C Corporation Advantages *
- The business wants to use a different fiscal year different than the calendar year – this can delay recognition of income, and eliminate additional costs for short-lived corporations.
- The business will show a profit immediately and earn enough to fund desired specialized pre-tax benefit plans such as those listed below (that must also be paid to these employees; one person corporations can take full advantage of all these programs:
- Disability insurance (key people only).
- Up to $50,000 in life insurance (full time employees).
- IRC §105 Medical-dental reimbursement plans (full time employees).
- All net income will be paid out as salary (rather than as distributions), avoiding the 1.5% California franchise tax on annual distributions over $53,000.
- The business will have any non-resident alien shareholder.
S Corporation Advantages *
- The business may show a net annual loss of over $50,000 per shareholder per year.
- The business ultimately will be sold for a substantial amount, particularly if the goodwill on sale would be linked to the business name (not personally to the business owner).
- The business plans to retain earnings for future business spending.
- The shareholders want to reduce payroll taxes by limiting their salaries to a “reasonable” amount and paying the remaining profits out as S corporation distributions (save 13.8% on amounts up to $168,600 in 2024, and 1.4%-2.3% over that amount, taking into consideration the 1.5% California franchise tax on S corporations).
- The individual shareholder will have annual taxable income less than $191,950 (married couples with annual income less than $383,900) in 2024, and so is eligible for a tax deduction of 20% of “qualified business income” under the Tax Cuts and Jobs Act of 2017 (phases out completely for individuals at $241,950 and married couples at $483,900, in 2024).
- The preferred corporate form is not clear, and a change in corporate status may be desired.
* This tax comparison of C corporations vs. S corporations is intended to address a typical startup of a small business organization. This comparison is not exhaustive, nor does it apply necessarily in each and every circumstance. The contents of this website are not intended to be, nor shall they be considered, legal advice or legal opinions. Please see your CPA and/or attorney for more thorough coverage of the subject.
Caveat:
Pursuant to applicable federal regulations, we are required to inform you that any advice contained in this communication is not intended to be used nor can it be used for purposes of (1) avoiding tax penalties or (2) promoting, marketing or recommending to another party any transaction or matter addressed above.