Switching to a C Corp Could Save Your Business Thousands — Here's How

I own a firm dedicated to business optimization. Since the passage of the "One Big Beautiful Bill Act," or OBBBA, I'm now more inclined than ever to advise my larger and more growth-focused clients to consider the C corporation over other popular entity types such as LLCs and S corporations. That said, for smaller businesses and owners who rely year-by-year on their business profits for personal living expenses, the LLC or S corporation may still be the right fit for maximum tax savings.

A refresher on pass-through income

In order to understand the impact of the new law and what it means for your business, it's important to understand "pass-through income." If you have an LLC, sole proprietorship, partnership or an S corporation that makes money this year, you can rest assured you will be taxed on that income. Your profits pass through from your business and are taxed as individual income. The C corporation, however, presents a different dynamic. Your business profits don't automatically pass through to you individually but are taxed at the corporate level.

Now, if your C corporation issues a dividend or you sell your shares, then the money you receive counts as individual income and is taxed as such. But here's the thing, no one can force you to issue a dividend or sell shares in your company. Plenty of C corporation owners reinvest most or all of their profits back into their business. And why shouldn't they? Especially now, given that the OBBBA incentivizes you to do just that.

Related: Why New Tax Rules Could Be a Game Changer for Your Business

Corporate tax is way less expensive than individual income tax

To reiterate, C corporations must pay corporate tax on profits. Corporate tax is always less costly than individual income tax. Prior to 2018, the corporate tax rate could go as high as 35%, similar to the highest income tax bracket. This is no longer the case. Corporations have enjoyed a flat 21% tax rate for the past several years, "flat" meaning that regardless of whether your business profits $50,000 this year or $50 million, you pay 21%. The new law makes this 21% flat rate permanent.

C corporations are the only business entity type that, when profitable, doesn't automatically trigger individual income tax at the end of the year. So, a good strategy for a business owner with a C corporation is to maximize the amount of profits taxed at 21%, and only 21%.

The OBBBA makes it easier than ever to defer individual income tax

The trick is to retain as much of your earnings as possible within the corporation. The new law provides ample means for doing just that. There's a kind of cascade of incentives in place in the OBBBA that encourages higher levels of corporate earnings retention. Consider, for instance, the bill's making legal the immediate expensing of Research and Experimentation costs. In the past, it was required that such costs be expensed in accordance with a specific schedule over several years.

Research and Experimentation costs can now be deducted in full in the same year they're incurred. If you were looking for a reason to retain more of your business's earnings and benefit from the ensuing tax savings, then deploying more R&E funds to quickly reduce your overall tax liability may be a brilliant move.

Pass-through entities still benefit

Don't get the wrong idea. The OBBBA is by no means hostile towards pass-through entity types. In fact, the bill provides pass-throughs with a nice and exclusive perk in the form of the now permanent 20% QBI (Qualified Business Income) deduction. C corporations don't get this.

Here are the specs: Though subject to income limits and other restrictions, for most businesses, the QBI deduction flat out erases the tax liability for 20% of your pass-through entity's taxable income. The benefit begins to phase out at $165,000 for single status tax filers, and $330,000 for married filing jointly.

How should I weigh the QBI deduction for pass-throughs against C corp benefits?

For starters, if your income is lower than the aforementioned thresholds ($165,000 for single, $330,000 for married) then the 20% QBI deduction afforded by your pass-through entity will be hard to pass up. Once your business earns above these thresholds, a pass-through can end up costing more in taxes than a C corporation, since C corps can retain profits without immediately triggering personal income tax.

Related: Here's What the 'One, Big, Beautiful Bill' Means for the Franchise Industry

What else should I know about the OBBBA?

The new law extends other existing business perks that can benefit C corporations and pass-throughs alike. The 100% Bonus Depreciation provision will no longer phase out but is now made permanent. This allows businesses to immediately deduct the full costs of qualified tangible property rather than deduct those same costs incrementally year after year.

Similarly, the bill's increased expensing cap provides tax savings — particularly for small- and medium-sized businesses — by increasing the maximum amount a business owner is able to write off in Section 179 expenses (machines, equipment, office furniture, computers, etc.) The bill's $2.5 million expensing cap is time and a half more than the previous cap of $1 million.

While these incentives benefit both corporations and pass-throughs by reducing overall taxable income, they also uniquely expand opportunities for C corporations to retain earnings, fueling reinvestment and long-term growth.

The effects of the OBBBA will be felt for decades to come, a wave of growth and tax savings for businesses of all types and sizes. If you're looking to reinvest your earnings in growth, innovation and expansion, talk to your attorney about the benefits of moving into a C corporation or contact a business formation services provider for more information.