Changes in the new tax law should spur you to take a closer look at the C corporation you may have set up years ago for your farm or ranch.
Signed into law last December, the Tax Cuts and Jobs Act of 2017 is the largest overhaul of the United States tax code in 30 years. One of biggest changes of this tax-reform law impacts C corporations.
The new tax rates for C corporations are much simpler than the old law—although there are a few provisions that are complicated. Here are some highlights of the new tax law, which became effective Jan. 1, 2018:
C corporations now will be taxed at a flat rate of 21 percent. Before, they operated under a marginal tax bracket system: the more you earned, the higher your tax rate. That’s not the case anymore.
Despite the new 21-percent flat-tax rate, the changed law will result in tax increases for those C corporations that typically have less than $90,000 of taxable income. This means you should rethink your strategy for a C corporation going forward. You’ll have to decide what your taxable income level should be.
The corporate alternative minimum tax has been repealed. It no longer applies to C corporations.
The flat-tax provision for C corporations does NOT sunset. It’s permanent. Some other provisions of the new tax law will sunset at a later date but not this one.
Not business as usual for C corporations
These changes mean a whole new paradigm for C corporations. These legal structures, which have been around for decades, allow businesses to limit their owners’ legal and financial liabilities. C corporation owners, or shareholders, are taxed separately from the business entity. C corporations are also subject to corporate income taxation. Business profits are taxed at both corporate and personal levels, creating a double taxation situation. Under the new law, that’s still the case.
In recent years, many agricultural businesses have ignored C corporations as they adopted other business structures, such as partnerships or LLCs. Many of you may have retained the C corporation that has been part of your operation for years, but you haven’t added any new assets to it.
But, under the new tax law, there are reasons to reconsider the income, activities and strategy related to your C corporation.
Since December, my KCOE colleagues and I have been studying the tax ramifications for C corporations, and we believe there may be new uses—and tax-rate advantages—for these entities. C corporations do have benefits. Using them makes it easy to change ownership, because they include shares that can be bought or gifted. That allows the business to continue, regardless of who the owners are.
Moreover, there could be a benefit in considering a C corporation as the owner of another entity, such as an LLC or partnership, because of the ease of transferring shares. While we don’t advise putting long-term assets like land into a C corporation, an operating entity may still find other uses for it.
In addition, if you have two or three C corporations, you may want to consider merging them to save on administrative costs.
Focus on your C corporation
Act now if you’re thinking about revisiting the role or overall tax strategy of a C corporation. Remember, the new tax law took effect Jan. 1, which means almost five months of this calendar year have already passed. If your fiscal year runs on a different schedule, there are still impacts to consider.
C corporations make estimated tax payments, so make sure yours reflects the appropriate tax rate. From January on, you’ll want to use the new tax rate of 21 percent.
Before you covert or change your C corporation, do an in‐depth analysis. Consider income tax consequences, eligibility for government programs, and the impact on management, ownership, estate and succession.
It’s no longer business as usual with C corporations. Make sure you take the time to ensure you’re not missing an opportunity or setting yourself up for an “oops” that could have been avoided.
Editor’s note: Doug Claussen has more than 20 years experience with his agriculture and accounting expertise at K·Coe Isom as he helps ag business owners with financial, operational and tax challenges. He works with agribusinesses involved in beef production, dairy operations, grain production and marketing. Contact him at [email protected].
