Do S Corporations Still Make Sense?
With personal tax rates now topping out at 42%, compared with corporate rates of 34% (or 35% for businesses with income of more than $10 million), popular wisdom has it that owners of Subchapter S corporations should change to C-corporation status.
That's easier said than done, since the IRS permits corporate owners to switch their status only once every five years -- which means it's tough to make a habit out of trying to time your switches to take advantage of the somewhat erratic U.S. tax laws. Yet it's also true that S corporations retain some important advantages for owners, particularly if they intend to ultimately sell their companies.
The story so far: nobody has clear answers to the problem, and nobody is pleased about having to find them. Here are some CEOs' assessments:
Mitchell Jones, president of the commercial-interiors company Space & Asset Management, a $3.9-million S corporation in Dayton, Ohio: "We have three owners, and S-corporation status fits us best. But the last thing I want to do is send more money to the federal government. Right now we've asked our accounting firm to come up with a synopsis of how 'Billary's' changes are going to affect us. We will more than likely switch to C-corporation status."
Jack Brocksmith, president of TAG Express, a $4.8-million S corporation in Duluth, Ga., that licenses sports-team products: "We switched to an S corporation only a few years ago because of the tax laws. I've already met with my accountants for hours on this subject. There's no doubt that this will affect our bottom line. We're even looking into selling the company."
Peter Young, president of environmental consulting firm Apex Environmental, an $11-million S corporation in Rockville, Md.: "We'd probably switch, except there's a real advantage for us to operate as an S corporation, since we pay taxes on a cash, rather than on an accrual, basis. Last year that meant the difference between paying tax on $500,000 of profit versus $1.6 million -- which is kind of like getting an interest-free loan."
Gerard Bucas, president of computer-peripherals maker Great Valley Products, a $32-million S corporation in King of Prussia, Pa.: "Last year we raised $5 million in venture capital, which we structured as subordinated debt so we'd be able to retain our S-corporation status. Given the new tax laws, it wouldn't make sense for a company to start out as an S corporation right now."
Robert Plath, president of $13-million Travelpro Luggage, an S corporation in Deerfield Beach, Fla., that manufactures luggage: "We're taking a wait-and-see attitude. We know it's going to affect us, but we won't make any quick decisions."* * *