Converting Your Florida Business To a Corporation May Not Be a Good Move

Many Florida Business owners have considered upgrading their business to a C corporation. This move would provide a new, reduced 21% tax rate. This seems like a much better alternative than the tax rates that pass-through entity businesses currently face, which can reach as high as 37% under the new tax law. However, a closer look reveals that, despite initial impressions, converting to a C corporation might not be a smart move.

 

For starters, there is a double tax on C corporations. The 21% tax rate is initially applied to the profits, but an addition tax comes into play after the profits are distributed. This is taxed to shareholders at a 23.8% rate. For shareholders in the top tax bracket, the combined rate can reach as high as 39.8%, which is slightly higher than the largest tax rate on a pass-through entity, about 37%.

 

In addition to this high combined tax rate, C corporations in Florida are also subject to state income tax of 5% on profits, which is applied on top of the current tax rate. On the contrary, some pass-through entities can qualify for a 20% deduction in tax rate. Because of these additional tax rates and possible tax reductions, many business owners find it much more economically beneficial to remain as pass-through entities rather than converting to a C corporation.