S corp

Under current tax law a C corporation pays 35% top tax and a subchapter S (pass through) corporation pays 39.6% top tax. If this were the whole story and the objective was to pay less tax then the company would just change to a regular corporation and pay 35%. In a regular corporation the business pays 35% but when dividends are distributed and they get capital gain rate then another 20% in tax is paid. Suppose the Acme Corporation earns $100 in profit. Assuming it doesn’t do any international tax avoidance, it pays $35 in corporate tax. Then it distributes the rest to a shareholder, Carl, by buying back his shares. Carl gets $65, and because he held the shares for long enough he’s entitled to a 20 percent capital gains rate on that earnings (assuming he makes enough money doing other things to be in the top bracket). So he pays $13, leaving $52 in profits. The total tax rate on the profits was about 48 percent. Now let’s suppose that Acme is a pass-through. That $100 would go straight to Carl, who’d pay a 39.6 percent marginal rate on it. He pays $39.60 and keeps $61.40. He’s substantially better off than he would’ve been if Acme organized as a C corporation and paid corporate taxes. The new tax law lowers the C corp top rate to 21% and if nothing were changed with the S corps then they would all change to C corps. Thus the new law lowers the S corp rate to 25%.