Advisable Conversion from Sub S

[Edsel]

It is common for military contractors to have taxability in every state where they have an active contract.  I have a client operating in 14 states, who is a S corporation.

The corporation has zero income tax liability because the taxable income is passed on to the shareholders.  And the shareholders have to file in every state, unless the S Corp chooses to make composite payments at the highest possible rate to the various states.

Given that SALT and other factors limit the deductibility of state income taxes paid by the shareholders, is this yet another reason to bail out of Subchapter S status and file as a C Corp?

Given the low C Corp rate, and 15% usual limit on domestic dividends, the combined rate can now be less than 30% even if dividends are paid.  In some cases this can be less than ordinary income taxation on individuals.

[BulldogTom]

It is something to think about.  

Tom
Modesto, CA

[SaraEA]

If your S corp operates in CT, there is now a state entity tax of 6.99% so it will have a CT liability.  The shareholders will get a 93.01% credit on their individual returns.  This was passed to dance around the $10k cap on SALT deductions for individuals.  If any of you have partnerships that operate in CT, they too are subject to the entity tax.  And by the way, although this wasn't signed into law until the end of May, pass-through entities are now two quarters behind in their state ES payments.  Penalty waivers will be granted if the individuals paid their own ES on time and elect to let the entities claim the payments. Otherwise the entities will have to pay penalties for not following a law that was not passed until it was too late to make payments they didn't know about.  CAN YOU BELIEVE IT???

[Catherine]

13 hours ago, SaraEA said:

not following a law that was not passed until it was too late

I see a class action lawsuit based on it being against both the US Constitution and (to my knowledge) all state constitutions that ex post facto (after the fact) laws are NOT allowed.  The feds/states may NOT treat as transgressions actions that were legal at the time made.

[Lee B]

I did an analysis of a conversion from S to C for my largest S Corporation client back in March.

My conclusion was that while the gap is definitely narrowed, it was still advantageous for my client to remain an S Corp.

If a client wants to load up on fringe benefits, including a customized defined benefit plan, then I think a C Corp would be the way to go.

 

[Edsel]

4 hours ago, Catherine said:

I see a class action lawsuit based on it being against both the US Constitution and (to my knowledge) all state constitutions that ex post facto (after the fact) laws are NOT allowed.

I couldn't agree more.  The situation mentioned by Sara is typical of governments whose legislators are unaccountable for their titanic sloppiness, and enforce the fallout on citizenry while suffering no consequences themselves. 

However, history is loaded with infractions of ex post facto in tax law, especially on the Federal side.  How many times in our own careers are retroactive provisions enacted by congress which date back to the first of the year?  In particular are the 11th hour sessions around Christmastime which retroactively address the almost-expired current year back to January 1??  Fortunately, most of these 11th hour changes are benevolent to taxpayers.

A Tax attorney once told me the IRS is able to use some device to escape the effectiveness of ex post facto, but he didn't elaborate and I didn't listen well. 

[SaraEA]

I always thought the federal gov't could pass retroactive tax decreases but not tax increases.  CT has passed retroactive increases before and gotten away with it.  I really don't want to spend the summer reading CT's code, but you posters tempt me.

[Catherine]

You can pass a TAX to affect the entirety of the current year.  Increase or decrease.  What is NOT allowable is to enforce penalties on entities for not making payments towards a tax that did not yet exist.  Probably includes the interest, as well, but I would not swear to that.

[Edsel]

Section 199A is a factor to be considered in the subject conversion.  I need to ask, because the 20% reduction is passed through from an S corporation to the personal return just before the arrival at taxable income. 

So I will have to ask about the Section 199A for a C Corp because I simply don't know.  Does a C Corp have the potential 20% reduction as well?

[Lee B]

No, Section 199A only applies to Qualified Business Income at the 1040 level from pass thru entities (including Schedule C).

 

[Lion EA]

Passthrough entities, such as partnerships and S-corporations, that pay the tax on the passthrough income.  Supposedly to help even the playing field with the new, lower 21% top C-corporation tax rate.