President Trump’s plan passes, and Sample Corporation earns $1 million and now pays $150,000 (15 percent) at the corporate tax level, leaving $850,000. Then the sole shareholder takes the remaining amount as a dividend and pays another $170,000 in taxes at the individual level, leaving him with $680,000. Sound great? Well, we need to compare apples to apples. How do C corporations stack up if President Trump also cuts the tax rate on S corporations and partnership income?
President Trump’s campaign promise was to lower all business income taxes to the 15 percent rate, requiring a divergence from the current law no longer taxing partnerships and S corporations at individual tax rates as pass-through income. If this is the case, the member in an LLC or the shareholder in an S corporation would pay only $150,000 on the same $1 million in income that our C corporation shareholder paid under President Trump’s new plan. In the end, this means there is still a tax rate spread of 17 percent (32 percent for C corporations versus 15 percent for partnerships and S corporations).
So even with President Trump’s proposed changes, C corporations are still at a comparative disadvantage due to double taxation. What could make a difference? To answer that, we need to look at the treatment of Section 1202 stock.