Small Business Financing and Franchise Financing Blog

Potential Tax Hikes Force People to Reconsider S or C Corp

Wednesday, June 3

Let the debates begin!

In President Obama's recently proposed budget, there is a future tax break coming for the middle class and the cuts, enacted on upper-income taxpayers under George W. will be allowed to expire at the end of 2011. Nothing has yet been finalized - but - it has started some pretty intense chatter.

In "To Avoid Tax, Set Up as a S-Corp or C-Corp?", BusinessWeek reported that most small business are structured as an S-corporation but more are considering a C-corp status due to worries about future tax hikes. The story reports that individuals currently taxed at 33% would see a 10% hike - to 36%. Thos at 35% would see a steeper increase to 39.6%. Because an S-corp passes income onto the business owner's personal tax return and inflates their personal earnings - even if they don't take it as salary.

Karen Klein reported she has "clients that are considering terminating their S-corp election, and we have some that were contemplating going from C-corp to S-corp, and they're revisiting their assumptions." In her article she also mentioned that "what we don't know is whether we'll have higher tax rates for corporations in the future. We may make a decision now based on today's rates but in the long term if corporate tax rates change then we could find out we've actually done something that will have a negative impact."

Their are many advantages, and disadvantages to both corporate entities. The only way to be sure which is the best for your business is to talk to your qualfied tax advisor.