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or S-now white? What tax reform means when considering your business structure


By now, you know all about the new corporate tax rate — a flat rate of 21% vs. the previous top tax rate of 35% — arguably the most publicized change of the recently passed Tax Cuts and Jobs Act (TCJA).

Other TCJA changes impacting businesses include:

• A potential 20% reduction of taxable income for pass-through entities
• Repeal of the corporate alternative minimum tax
• Enhanced options for expensing new assets
• A new restrictive limitation on deducting interest expense
• Elimination of the favorable Domestic Production Activities Deduction (DPAD) for manufacturers

So if you’re an S corporation or other pass-through entity, restructuring as a C corporation is a no-brainer, right? The answer is: it depends. When it comes to business structures, one size does not fit all. The decision to reorganize should only be made after carefully considering your options, including what makes most business sense for your organization—now, and in the future.

Meet C-inderella Corp., a niche footwear manufacturer specializing in one-of-a-kind glass slippers.

Currently structured as a C corporation, the reduction in their corporate tax rate to 21% is very favorable. However, their owners are nearing retirement and may want to sell the company in the next few years. As a C corporation, any taxable gain on assets resulting from the sale could be subject to double taxation—but not if they restructure as an S corporation, or if the company is located in a tax-exempt state like New Hampshire. Knowing this, C-inderella Corp.’s owners should plan ahead and consider the various tax consequences of being a C corporation or S corporation at the time of sale.

Now consider S-now White Corp., a designer of custom-made, rustic-themed sleep systems. 

Currently structured as an S corporation, the potential 20% reduction in their pass-through taxable income is also very favorable. However, their owners have accumulated a fair amount of debt which they’d like to pay down, and are also attempting to accumulate capital for future growth. While restructuring as a C corporation means a lower corporate tax rate, it also means S-now White Corp. is now subject to additional federal taxation on any cash distributions made to their shareholders. Their owners will want to weigh the pros and cons of being a C Corporation or S Corporation under those circumstances, and which results in the highest after-tax cash flow.

The takeaway? No two businesses are exactly alike, and deciding on the most favorable entity type requires careful consideration on a case-by-case basis. Nonetheless, there are some questions every company can benefit from asking themselves, including:

What are your current and long-term business objectives? 

With great earnings comes great responsibility—what will you do with them? Depending on your short- and long-term business objectives, you’ll need to prioritize reinvestment against issuing dividends, and each has major implications when it comes to optimizing your tax structure.

What is the current tax situation of your business owners?

A business is only as good as its owners—and their tax rate. Even if the new corporate rate is ideal for your business, the individual rate of your owners and their family members can make a big difference in your ultimate tax liability, especially if you’re dividend-minded.

Which states do you operate in?

If your business operates in multiple states, you’re also subject to those states’ respective tax laws—which aren’t always the same. From residency issues and income apportionment to tax rates and more, state tax laws can vary widely, adding extra layers to your tax landscape.

What’s more, with a five-year waiting period on restructuring again, the sooner you can ask—and answer—these questions, the sooner you can plan around them. A thorough analysis at both the entity and individual level can help avoid surprises, mitigate risk, and identify valuable tax savings opportunities.

Whether you choose to restructure or not, enlisting the guidance of a qualified advisor can help take the guesswork out of evaluating your options — giving you peace of mind that you’re taking advantage of the entity type that makes the most sense for your business.

Read this if you are a financial institution with income tax credit investments.

UPDATE: This is an update to an earlier article.

In March 2023, the Financial Accounting Standards Board finalized its proposed Accounting Standards Update (ASU) through the issuance of ASU No. 2023-02 – Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force). For public business entities, the ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. In general, the ASU must be applied on either a modified retrospective or a retrospective basis.

Original article:

Financial institutions and other businesses that participate in tax credit investments designed to incentivize projects that produce social, economic, or environmental benefits could benefit from proposed rules that simplify the accounting treatment of such investments and result in a clearer picture of how these investments impact their bottom lines.

FASB proposal

On August 22, 2022, the Financial Accounting Standards Board (FASB), issued a proposal that would broaden the application of the accounting method currently available to account for investments in low-income housing tax credit (LIHTC) programs to other equity investments used to generate income tax credits. The proposal, titled “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”, would expand the eligibility of the proportional amortization method of accounting beyond LIHTC programs to other tax credit structures that meet certain eligibility criteria.  

FASB introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits in ASU 2014-01. However, the guidance limited the proportional amortization method to investments in LIHTC structures.

The proportional amortization method is a simplified approach for accounting for LIHTC investments in which the initial cost of the investment is amortized in proportion to the income tax credits and other benefits received (allocable share of depreciation deductions). The cost basis amortization and income tax credits received are presented net on the investor’s income statement as a component of income tax expense (benefit). Under existing guidance, investments in non-LIHTC projects are accounted for using either the equity method or cost method, depending on certain factors. 

The proposal aims to address the concerns that the equity and cost methods do not offer a fair representation of the economic characteristics for investments for which returns are primarily related to federal income tax credits. Supporters of the proposal argue that the accounting method applied should not be determined by the legislative program under which the tax credits are authorized, but instead by the economic intent under which the investment was made. The hope is the FASB proposal will create a heightened sense of uniformity in accounting for investments in income tax credit structures. 

Additional provisions

Other provisions within the proposal would require a reporting entity to “make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis” and disclose the nature of its tax equity investments and the impact on its financial position and results of operations. 

The significance of this proposal is amplified by the uptick in tax credit programs in recent years, including the New Markets Tax Credit (NMTC), Historic Rehabilitation Tax Credit (HTC), and Renewable Energy Tax Credit (RETC). While the FASB has yet to declare an effective date for the implementation of the proposal, comment letters from stakeholders were due October 6, 2022. 

For more information

To discuss the impact this new accounting pronouncement may have on your financial institution, please contact the BerryDunn Financial Services team. We’re here to help.

FASB proposes changes to accounting for income tax credits

Read this if you do business in New Hampshire.

On June 10, 2021, Governor Chris Sununu signed Senate Bill 3-FN (“SB3”) into law, clarifying New Hampshire’s state income tax treatment of federal loans under the Paycheck Protection Program (“PPP”). As a result of this legislation, New Hampshire now fully conforms to the federal income tax treatment of the debt forgiveness and deduction for expenses related to PPP Loans. New Hampshire businesses that had PPP loans forgiven may now exclude the debt forgiveness from gross business income and deduct the related business expenses in the same manner that they can for federal income tax purposes.

The exemption of PPP loan forgiveness from the New Hampshire Business Profits tax base is applied retroactively to taxable years ending after March 3, 2020, corresponding with the date of the enactment of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act). New Hampshire taxpayers who received debt forgiveness through the federal Paycheck Protection Program should review their 2020 New Hampshire tax returns to evaluate whether an amended return should be filed for potential refund opportunities.  

If you have questions about how the tax law changes may affect you, please contact a member of our state and local tax team.

Attention taxpayers doing business in New Hampshire