No wonder S-corporation owners are confused about whether new tax rates justify a switch to C-corporation status. "There are no clear-cut answers," says John Evans, partner in charge of the Metro New York office of Arthur Andersen's Enterprise tax practice. That's especially true for an ongoing operation. Evans offers some hypothetical comparisons:
How much in taxes would be paid by a corporation with $500,000 in taxable income?
S corporation that makes no annual shareholder distribution $227,000
C corporation that makes no annual shareholder distribution $170,000
S corporation distributing all earnings $227,000
C corporation distributing all earnings $309,000
But if your ultimate goal is to sell the company, then retaining S-corporation status has some important advantages, says Evans. His example: shareholders who sold an S corporation worth $3 million would net $2,160,000 after paying only the capital-gains tax. Shareholders who sold an equivalent C corporation would have only $1,382,000 left after paying corporate and capital-gains taxes.
Source: Arthur Andersen, New York City, August, 1993.