Prior to 1986, if you had a business you most likely had a C Corporation. That all changed in 1986 thanks to the 1986 Tax Reform Act. I remember hovering around the fax machine, waiting for this new law to come out… right at Christmas vacation time. The tax department (at the big CPA firm I worked at) divided up the law and went home to decipher it and report back.
That was when I had to get up to speed fast on what an S Corporation was. Looked like everybody would be using those for business after 1986.
And time marched on…. Up until right now, we still use C Corporations, but only in very specific cases and for a limited number of reasons.
That’s all changing this year. The C Corporation is coming back in style as personal income tax raise, new surtaxes get assessed and even (dare we hope?) a possible reduction of the C Corporation tax rate.
When you should use a C Corporation:
- Your business is making over $200,000 per year. This number will drop as the income tax rates go up. It’s possible the C Corporation may be needed at an even earlier time.
- You have a lot of medical expenses or medical insurance costs. The C Corp provides better deductions for owner/employee benefits.
- You are going public.
- One or more of the shareholders are foreign, non-resident owners.
In my next few blogs, we’re going to talk about some of the traps of C Corporations you want to avoid.