In the past, if you were a professional service company, under the IRS definitions, you were penalized if you operated in a C Corporation.
Professional Service Companies (PSCs) were defined as those that provided accounting, medical professional, engineering, architectural, legal and consulting services.
If you had a PSC, you usually ended up operating with an S Corporation which is a flow through entity. That means the income you make in the company would flow through to you on a K-1 and be taxed at your personal tax level. You still had to file an S Corp tax return, but it was actually mainly informational only. There was no federal tax. A few states, like California (of course) do tax S Corporation income if it meets certain parameters, but it is free from federal tax.
No federal income tax on S Corporations doesn’t mean the income is tax-free. It just means the S Corporation doesn’t pay it. You do. The owners of the S Corporation do.
A C Corporation is different. The tax is paid by the corporation. The income (or loss) does not flow through to you. This could be a big benefit if your personal tax rate bracket is higher than the C Corporation would be. Overall there is less tax.
However, in the past a PSC could not take advantage of that.
That’s all changed with the Trump Tax Plan, effective 1/1/2018. You now pay a flat rate of 21% just like any other C Corporation.
It’s not quite that simple, of course. There are other things to consider if you move a C Corporation. But now at least we have one more possible tool in the tool box if you have a business that provides services.
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