Tax Reform Lessens Burdens to Converting Your C-Corporation

Elizabeth Williams reported recently at DTN that, “There was a time when C-corporations made a lot of sense for farmers, but as tax laws changed and the benefits eroded, farmers found changing their business structure could be cumbersome and expensive. Tax advisers say 2017’s Tax Cuts and Jobs Act makes it easier than ever to make the switch.

“‘If you’ve been sitting on the sidelines waiting for a better time to get out of your C-corp, today is a good time,’ said Doug Claussen, certified public accountant with KCoe Isom in Goodland, Kansas.

“Many farm corporations were formed in the 1970s because of lower corporate tax rates, ease of farm succession and deductible fringe benefits.”

The DTN article noted that, “‘C-corporations were the best thing for many years until the 1986 tax law,’ Claussen said. But for many, the tax consequences of converting were too steep to justify a change.

The new law lessens the penalties for converting from a C-corporation to an S-corporation, and tax experts say it’s especially beneficial for farmers with an heir or heirs that aren’t involved in business operations. C-corporations also aren’t eligible for the new Section 199A deduction.”

Ms. Williams added that, “C-Corporations are not eligible for the new Section 199A deduction, which is reserved for individuals and pass through-entities like S-corporations.

“The new tax law cut the top corporate tax rate from 35% to 21%, while pass-through entities only saw their top rate decrease from 39.6% to 37%. The new Section 199a deduction of 20% for sole proprietors and pass-throughs was seen as a way to level the playing field with the new tax cut for C corporations.”

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