I'm skeptical that tax reform has a better chance of making it through this Congress than ACA reform, but:
Can anyone comment on how a lower corporate rate would likely affect S corps and incentives to form them? Maybe a new 15% rate wouldn't apply to such firms, but if it did, wouldn't it represent a pretty big new benefit/loophole for incorporation?
Wouldn't apply to S-corps, as pass-through taxation from the company is applied at the owners' personal tax rate(s).
But, indirectly, the biggest incentive that I can see would be with regard to retained earnings and reinvestment. For an S-corp, shareholders pay tax on profits according to their ownership percentage, irrespective of whether they even receive a distribution from those profits.
And, if on Jan 1, the company invests all of its profit in a new project (essentially wiping out the profit), it doesn't matter. Prior year taxes are still due from shareholders at the full rate. This can generally lead to forced distributions to shareholders just so they can cover taxes.
So, that's painful, especially for a business that's in growth/re-investment mode. Problem is, moving to a C-corp and being doubly-taxed at a 35% corporate rate, and again at a ~30% marginal personal rate is usually even more painful.
So, yeah, a much reduced corporate rate might allow for a different calculus there that incentivizes me to organize as a C Corp vs. S Corp. Let the company take the 15% corporate tax hit and keep the 20% balance vs the old rate. Plus minimize dividends to keep the max amount of money in the company to re-invest.
see my post above - at times trump has stated that this _would_ apply to pass-through entities (s-corps, sole proprietorships and LLCs). at the moment however, this point remains unclear.
The benefit of S-corps is to pass through taxation to the owner's personal tax return in order to avoid double taxation. There is no added benefit with lower corporate taxes because they are effectively 0% at the corporate level.
whether the corporate rate will also apply to pass-through entities is still an open question. most news articles about this topic just ignore this very important detail. the more tax-oriented sources however discuss the vagueness openly:
Can anyone comment on how a lower corporate rate would likely affect S corps and incentives to form them? Maybe a new 15% rate wouldn't apply to such firms, but if it did, wouldn't it represent a pretty big new benefit/loophole for incorporation?