Business Planning–Choice of Entity/Tax Planning Strategies-Business Entities

The Tax Cuts and Jobs Act of 2017 changed the C Corporation tax rate to 21%. Many believe that if the business owner’s marginal tax rate is higher than the corporate rate the owner should reorganize their business as a C corporation. How would you respond?
International Financial Reporting Standards, a widely used set of accounting principles, does not allow the use of the LIFO inventory costing method. Explain the reasons for disallowing this method and discuss the tax impacts a change from LIFO to FIFO would have on a business.
S Corporation owners have attempted to avoid employment taxes by distributing earnings instead of making payments through payroll. Discuss how the IRS has attempted to mitigate this and the issue accountants may face with regards to what is considered reasonable compensation for services.
Do the discussion and response each posted down below
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Generally, one would believe if the business owner’s marginal tax rate is higher than the corporate rate, the owner should reorganize their entity as a C corporation. This wouldn’t be considered tax planning opportunity in years past, as the corporate tax rate was 35%. The highest individual tax rate was around 37%. Additionally, C corporation profits are subject to double taxation. The corporation pays an entity level tax on profits, and a shareholder pays tax on the dividends (the distribution of corporate earnings) he receives. Additionally, a shareholder is not allowed to take any of the C corporation losses on his individual return.
The double taxation issue is a tough hurdle to get around when thinking about reorganizing a business entity to a C corporation. As such, tax savings are not the only item to consider. One must also consider the strategic direction of the company. Will the company want to raise a bunch of capital to expand, or will it want to become a publicly traded company one day? Becoming a C corporation may make sense. Is business continuity and succession planning a concern? Some entities cease to exist when an owner leaves the business or dies; this is not the case with C corporations. There are other taxes that may be a consideration – is the additional investment income tax a concern or AMT or self-employment tax? Will the owner benefit from the qualified business income deductions which will reduce his or her marginal rate so that any tax savings from reorganization are nil?
Does the owner plan to distribute earnings or retain them in the business? The double taxation issue may be mitigated in this instance. How much will it cost to reorganize? What will be the effect of state taxes if the entity reorganizes? In other words, my answer would be “it depends”. There are many factors one would need to consider with respect to this question and not just the tax rate.
References
Everett, J., Hennig, C.,