IS 2017 THE YEAR OF THE C-CORP UNDER TRUMP’S TAX PLAN?
IS 2017 THE YEAR OF THE C-CORP UNDER TRUMP’S TAX PLAN?
The “dreaded” double-taxation is arguably the chief disadvantage of the C corporation business entity (“C-corp”). Meaning, C-corps are taxed on two levels–(1) on income the business earns (corporate income tax rate) and (2) on income that is distributed to the shareholders (individual tax rate). According to the Trump/Pence Tax Plan (“Trump Tax Plan”), the Trump Administration would like to make the C-corp a more attractive business entity. Of course, modifications to laws that may or may not make this business entity more appealing are pending Congressional approval.
Under the Trump Tax Plan, the C-Corp would continue to be taxed at two levels. However, the highest corporate income tax rate would be reduced from 35% to 15%. At the individual shareholder level, the highest tax rate would remain at 20%.
Therefore, under this plan, the highest aggregate income tax rate (corporate tax rate + individual tax rate) would be 35% instead of the present 55%. Is the C-corp looking more attractive to you yet?
Here’s an illustration demonstrating how the C-corp’s taxation rate works now compared to the Trump Administration’s Proposal:
Let’s assume that your business is structured as a C-corp. Using simple math, let’s also assume that only $200 of your business’ earnings is subject to taxation in a given tax year. (Admittedly, this example either represents a business’ best year ever or worst year depending on its net profits and allowable tax deductions). Assuming your business falls within the highest tax rate, here’s how much your business would pay in taxes under each scenario:
(Corporate Level + Individual Level = Uncle Sam’s cut)
TODAY: $65.00 (35%) + $40.00 (20%) = $105.00
VS.
TRUMP PROPOSAL: $30.00 (15%) + $40.00 (20%) = $70.00
Imagine if your taxable income was $200,000 instead of $200.
Not only does Donald Trump’s plan propose to lessen the impact of double taxation, it also proposes extending additional benefits to C-Corps that were previously only enjoyed by other business entities. For instance, he proposes lifting restrictions on ownership and giving C-Corps the ability to have an unlimited number of shareholders.
If the Trump Administration can convince Congress to change the corporate income tax rate for C-corps, we may see more C-Corps in 2017 and the years to come. Keep in mind, these changes have not happened as of yet. We’re still waiting to see what this new administration will and can do; especially considering that the tax reform discussion played a huge role in the Trump/Pence campaign platform.
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