Calvetti Ferguson

Construction Tax Planning – Choosing between S-Corp and C-Corp

Choosing between S-Corp and C-Corp

The Tax Cuts and Jobs Act (TCJA) brought about a myriad of changes to C-Corp and S-Corp tax rules. Over the past 40 years, tax practitioners have seen the effective corporate tax rates increase relative to personal income tax rates. The TCJA brought a significant reduction of the federal corporate tax rate and not quite the same reductions in personal tax rates. It is easy to see why a corporate tax structure is a much easier tax pill to swallow and may be the most tax efficient entity type if a large portion of earnings are not being distributed to owners, but are being retained in the company for growth and\or debt repayment.

  • Highest effective tax rates of S-Corp net income – 37% (29.6% with full section 199A deduction)
  • Highest effective tax rates of C-Corp net income – 21% (plus 15% or 23.8% on dividend distributions)

Considerations to keep in mind for converting from an S-Corp to a C-Corp:

  • Are Entity/Owners eligible for QBI Deduction?
  • If changing from S- to C-Corp, how are historical earnings taxed leaving a C-Corp
    • Per 1371(e)(1) during the post-termination transition period (PTTP) the corporation is allowed distributions tax free to the extent of AAA. These distributions decrease the owner’s basis in the stock. Note – lack of clarity what happens to unused AAA if re-elect S status down the road.
    • After PTTP closes distributions are treated as pro-rata coming from AAA and E&P for an eligible S-Corp (same ownership proportions as S-Corp when C-Corp)
    • PTTP generally ends on later of one year after S-election revocation or due date for filing the final S-Corp return including extensions.
  • Plan for future cash distributions to owners (beware, second layer of tax)
  • Future plan to exit the business (beware, second layer of tax)
  • Must remain C-Corp for five tax years.
  • Must consider consequences for 5 years post re-electing S-Corp status


Chart comparing the pre- and post-TCJA impact of an S- and C-Corporation:

S-Corporation C-Corporation
Pre-Tax Law Post-Tax Law Pre-Tax Law Post-Tax Law
Qualified Business Income $1,500,000 $1,500,000 $1,500,000 $1,500,000
DPAD  – 9% (135,000) (135,000)
199A Deduction  –  20% (300,000)
    Net Taxable Income $1,365,000 $1,200,000 $1,365,000 $1,500,000
Tax Rates 39.6% 37% 34% 21%
    Tax Expense $540,540 $444,000 $464,100 $315,000
Tax on Distribution of Income / Dividend $207,180 $237,000
    Total Tax $540,540 $444,000 $671,280 $552,000
    Effective Tax Rate 36% 29.6% 44.8% 36.8%

Kyle_Kmiec

Kyle Kmiec, Senior Tax Manager

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Contact Kyle with your questions about construction tax planning.