C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.
And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.
But for some of you, the C corporation could provide the best tax outcome, especially since you can bypass the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA), with a C corporation.
Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:
- Income taxes
- Real property taxes
- Personal property taxes
- Foreign income and real property taxes
Tax reform took two direct actions against your itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,
- you can’t deduct foreign real property taxes, and
- your combined state and local income, real property, and personal property tax deductions may not exceed $10,000 ($5,000 on a married filing separate return).
If you operate your business as an S corporation, the S corporation passes its net income to your individual tax return. This causes you, the individual, to pay state income taxes on the S corporation income. Those state income taxes are subject to the $10,000 cap.
C Corporation Loophole
But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Schedule A. The limit does not apply to C corporations.
If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return. How on earth do you figure out which is best?