When chosen wisely, the right business structure helps to provide liability protection and can offer tax advantages. Certain changes can trigger a need to reevaluate the chosen structure. One such trigger: a change in tax law.
Rarely is there as large a change to tax law as that completed by Congress at the closure of 2017. The comprehensive federal tax reform, commonly referred to as the Tax Cuts and Jobs Act of 2017, led to massive changes in the Tax Code. These changes have led many business owners to reevaluate the tax advantages once present with an S-corp. In some cases, a reevaluation may lead to the decision to change from an S-corp. to another taxable form.
Considering a change? Take these factors into account.
Tax implications are just one factor to take into consideration before changing from S-corp status. For those who are looking to make a change, consider the following:
- Easy to leave, difficult to return. Business owners can generally revoke an S election. Typically this requires a vote of the owners. Getting it back, however, is much more difficult. changes in the owners may make the entity ineligible, and opting back in to Sub S may be a taxable event.
- Cash in the coffers. Corporations are required to distribute accumulated adjustments account (AAA) to shareholders following the post-termination of an S corp election transition period (PTTP). As such, the corporation needs to take into consideration whether or not it has enough funds readily available to make this distribution.
- Subsidiaries. The termination of the S status of a corporation will also result in the termination of this status for any qualified Subchapter S subsidiary (QSubs).
These are just a few of the considerations to take into account before making a change. An attorney experienced in business and tax planning issues such as these can provide additional guidance and better ensure the right decision is made for your business interests.