To C Corp or Not to C Corp: That is the Question for the Construction Industry
Following the signing of the Tax Cuts and Jobs Act, a question that has been raised quite frequently is whether partnerships or S corporations should convert to C corporations.
This question needs to be answered with caution; as with many things related to the new tax reform, the answer is: it depends.
Much has been said about the removal of the alternative minimum tax (AMT) and the new flat tax rate of 21% on C corporation taxable income. Each change to the tax law comes with its own advantage or disadvantage.
The most significant change for the construction industry is the removal of the dreaded AMT add back for construction contractors utilizing a method other than percentage of completion.
Contractors operating under the umbrella of a C corporation can now defer taxable income for a year or more, depending on their method of accounting for long-term contracts. This unfavorable AMT add back still exists for contractors filing as S corporations and partnerships, making a conversion to a C corporation all the more appealing.
However, for certain C corporations, the advantages of the AMT removal may not be worth the drawbacks. While the new flat tax rate is reduced for some C corporations, it actually reflects a 6% increase (from the previous rate of 15%) for those with taxable income under $50,000. And perhaps the biggest pitfall of all remains unchanged: a C corporation pays tax on its taxable income, as well as shareholders paying tax on any dividends received (i.e., double taxation).
For the majority of businesses, it makes tax sense to keep an S corporation or partnership as such. However, for those operating in the construction industry, the tax benefits of the repeal of the C corporation AMT should be carefully compared to the drawbacks of a potential tax rate increase as well as double taxation. Each contractor’s individual situation will be different, and consultation with a tax professional is recommended.