A new study by Penn Wharton predicts a “mass conversion” of pass-through businesses to C corporation under the Tax Cuts and Jobs Act. Likely converts are those professional services businesses that don’t qualify for the new 20% qualified business income deduction (QBID). These firms are attracted to the lower corporate tax rate of 21%, as opposed to the pass-through rate of around 40%, particularly if they have the ability to defer paying out dividends, the study says. Researchers forecast that 235,780 U.S. business owners will switch from pass-through entity owners to C corporations.
Hold on: In a blog post, the S Corp Association says pass-through businesses are converting, just not “massively” yet. That will come when the deduction expires. “We’re not sure how ‘mass’ this conversion is, given that there are more than four million S corporations and nearly that many partnerships and LLCs,” it writes. “Their estimate is less than five percent of the total population here. Less than one percent if you include sole proprietors.” The real “mass” conversion is yet to come, it says, but only if Congress fails to make the deduction permanent.
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