Lower income tax rates have made incorporation an attractive strategy to some business owners, but accountants warn that entrepreneurs ought to think twice before going corporate.
The Tax Cuts and Jobs Act sought to ease taxes on businesses in two ways.
One provision makes available to entrepreneurs a 20 percent deduction on qualified business income. This break is for pass-through entities — including sole proprietorships and S-corporations.
Business owners who wish to qualify for the full deduction must have taxable income below $157,500 if single, or $315,000 if married.
Entrepreneurs whose income exceeds those thresholds hope to take advantage of a different provision in the new tax law. This one lowers corporate tax rates to 21 percent from the top rate of 35 percent.
Here’s the catch: They’d have to convert their pass-through entity to a C-corporation.
“The minute the law was passed, people said, ’21 percent? Great. We’re gonna convert,'” said Carolyn Mazzenga, office managing partner and CPA for Marcum LLP in Melville, N.Y.
“We basically had to slow people down and say, ‘Let’s talk about this,'” she said.
Here’s why rushing to turn your business into a C-corp may be a costly mistake.