The Future of C Corporations | USTaxAid

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The Future of C Corporations

Written by Diane Kennedy, CPA on September 13, 2011

9-13-1It’s always interesting to hear Democrats and Republicans talk specifically about the same tax reform and amazingly, agree! And it’s especially interesting to me because they are talking about something near and dear to my heart – significant tax reductions for C Corporations.

Before you think that’s only going to help the fat cat big corporations, think again. A C Corporation can be a small business owner’s best friend. In fact, prior to 1986, most businesses operated as C Corporations. We seem to be moving back to those same tax situations – increasing personal rates and lowered C Corporation rates.

Since I’m old enough to lay claim to practicing as a CPA prior to 1986, I remember what a shock it was to move away from C Corporations. And I’m relieved to think we soon are going back to them.

There are some tricks to C Corporations. For example if your C Corporation would be a:

  • Personal Service Corporation (like for a medical practitioner, engineer, accountant, lawyer or other consultant) or
  • Personal Holding Company,

Look out!

Or if you are accumulated retained earnings or if you have controlled group issues, there could be some taxes and penalties you never expect.

But you’ll also pay a lot less in taxes and have a lot more tax-free employee benefits available for the owner-employee.

More than anything else, the C Corporation allows you to operate more like a business, in a business-like manner. You must keep real double entry books, because it’s part of your tax return. You must think carefully about how and when you make dividend distributions. You have to get more serious about your business.

And it looks like Congress is about to reward you, if you follow the rules.


  1. Eyecare 4 U says:

    I’m an eye doctor with a C Corp. I pay myself as an employee and take quarterly draws as owner of the corp. What do I have to “look out” for? I have less than 10 employees and lease my space and equipment.

  2. Megan Hughes says:

    Hi Eyecare,

    There are a couple of things that happen when you’ve got a PSC (Personal Service Corporation).

    First up, you get taxed at a flat rate of 35%, rather than going through a graduated system. So your tax bill is probably higher than it would be if you were taxed as an S Corporation.

    You’ve also got a lower threshold for accumulated earnings, before an additional tax kicks in. So if you’re trying to hang onto capital to either invest in other businesses, etc., you could wind up with an unexpected tax bill there.

    Also, PSCs are stuck with a 12/31 year-end. Normally C Corps can choose their year-ends, which gives them more flexibility over when and how taxes are paid.

    Switching to S Corporation taxation won’t really change how your company runs, or impact your employees, but it would probably save you some money.

  3. Diane Kennedy says:

    Ditto on what Megan said. An S Corp is probably a better choice for your medical practice. BUT if you have other things you do (like sell glasses), that function can safely stay inside the C Corporation.

    You can also flunk the C Corp PSC designation if 5% or more of your stock is owned by a non-professional or 5% of more of total time spent is in non-PSC activities.

    As an example, a vet also did horse boarding. He was able to prove that more than 5% of employee time was spent caring for horses in the boarding facility, so he was not a PSC. Guess it takes a while to muck out a stable.

  4. skybluetree says:

    Hi Diane,

    your Audios are very well done. I highly recommend them for people wishing to increase their business mindset and inteligence.

    I listened to a recording you did on business structure basics, with you and Carey Lampel, and at the end of the “advance business structure strategies for real estate investors” you mention a strategy you call “the jumpstart your wealth” strategy. As it involves using your business, real estste, and your own home to maximize your investment dollarand how one dollar can be used in multiple wealth building ways.

    Can you elaborate on this strategy more?


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