Overview

Main Menu Name: C vs S Corp

This calculation compares the tax burden of owning shares in a C Corporation vs. an S Corporation. In a C Corporation, taxable income is subject to a flat rate of 21%. To the extent that a portion of the remaining 79% is distributed to shareholders, these distributions are subject to tax at the shareholder level of 0% (low bracket), 15% (mid bracket), or 20% (max rate), plus a possible additional net investment income tax of 3.8%. No §199A deduction is available. By contrast, an S Corporation passes its ordinary business income to its shareholders, and pays no tax at the corporate level.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

C Corporations Not Eligible

§199A specifically makes income from a C Corporation ineligible for a passthrough deduction. First of all, it is not a "passthrough" entity because it is taxed at the corporate level. Second of all, it already got a huge tax break when the marginal corporate rate of 35% was reduced to a flat rate of 21%.

Leveling the Playing Field

The entire point of §199A is to level the playing field between a Corporation (21% flat rate) and passthrough entities (taxed at a Taxpayer's individual rate, which can be as high as 37% in the top bracket). By providing a 20% deduction on income that a Taxpayer receives from passthrough entities, Congress in effect lowered the marginal rate from 37% to 29.6% (37% x 20% = 7.4%; 37% - 7.4% = 29.6%).

Playing Field Not Fully Level

The §199A deduction does not reduce a Taxpayer's marginal rate to 29.6% in all circumstances:

1. A Taxpayer might be in any of the following marginal brackets: 12-22-24-32-35-37%
2. In Zones #2 and #3, the Wage and Capital tests can limit the amount of the § 199A deduction
3. In Zone #3, an SSTB loses the §199A deduction entirely
4. A Taxpayer might be subject to the 3.8% Net Investment Income Tax (NIIT), so that the marginal rate could actually go up (29.6% + 3.8% = 33.4%).

Total Tax on C Corporation Income Could Be 21% or Higher

1. $100 of Line 30 Taxable Income will generate $21 of corporate income tax
2. The untaxed $79 may or may not be distributed to shareholders as dividends
3. A shareholder might die before ever getting any or all of the dividends
4. Whatever portion of the $79 is distributed to shareholders will be taxed at the maximum capital gains tax of 0%, 15%, or 20% (or some combination), depending on where in the Taxpayer's income tax bucket the corporate dividends land (coming in on top of all other income)
5. If all $79 is distributed to shareholders, and if all of it is taxed at the 20% rate, then additional tax of $79 x 20% = $15.80 is incurred.
6. The total tax on the same $100 is now $21 + $15.80 = $36.80 = 36.8%.
7. Some or all of the corporate dividends might be subject to the 3.8% Net Investment Income Tax (NIIT).
8. Thus, total federal income tax (C Corporation + Taxpayer) on the original $100 of corporate income could be 36.8% + 3.8% = 40.6%.

Getting Started

Entering Data

1. Tax Year:  Enter the year for which the federal income tax is being calculated. The program handles from year 2018 onwards. For future years, the program will default to the current year.
   
   
2. Filing Status:  Choose the applicable filing status - Single, Joint, Separate, Head of Household, or Estate or Trust
   
   
   
3. Taxpayer's Share of QBI: Enter the taxpayer's share of the QBI.
   
   
4. Taxpayer's Other Income: Enter the other income for the taxable year.
   
   
5. Dividend from C Corp: Enter the dividend from the C Corporation.
   
   
6. Tax Rate of Dividend: Enter the tax rate of the dividend (0%, 15%, or 20%, or a blended rate).

Results

The purpose of this screen is to illustrate the difference in tax result for income earned by a C Corporation vs. an S Corporation.

S Corporation

The S Corporation is just one of the several passthrough entities that could have been selected, so a similar illustration could compare a C Corporation vs. a partnership or sole proprietorship.

S Corporation Can Pay Its Shareholders W-2 Wages

One advantage of an S Corporation over the other passthrough entities (not shown here) is that an S Corporation can pay its shareholders W-2 Wages. Thus, if the Taxpayer is in Zone #2 or #3 (non-SSTB) or Zone #2 only (SSTB), such wages might make a difference in the amount of §199A deduction that is available.

Advantage of S Corporation over C Corporation

In the simple case of $100,000 of QBI, note the following:

1. C Corporation: $100,000 x 21% = $21,000 of tax. Net after corporate tax: $79,000
2. S Corporation: $100,000 x 20% §199A deduction = $20,000
   $80,000 taxable income, tax of $9,479. Net after pers tax: $90,521

Of course, there are many more variables that can go into this equation (including whether the corporation distributes its net after tax as dividends to it shareholders, who would then pay dividend tax of 0%, 15%, and/or 20%).