The late December tax law changes have sparked a debate about whether bankers in subchapter S institutions should convert to C corporation status. Several speakers at the Bank Owners’ Seminar in Kansas City on April 17 shared thoughts on the question. The one-day forum was hosted by the Bank Holding Company Association.
Bob Monroe, legal counsel with Stinson Leonard Street, said four clients have asked him to conduct evaluations to determine the best incorporation structure for their situation. “In three of the four cases, they are going to revoke their S-election and go to a C corp,” he said.
Brian Mall, a partner with the accounting and consulting firm BKD, said he also has been asked to provide counsel for clients reconsidering their incorporation status. He said of the four banks he’s evaluated, owners at three of them are retaining their S-election. “One might change,” Mall said.
Adam Maier, an attorney with Stinson Leonard Street, stressed that the situation at each bank is unique, but as bankers think about their own situation, they should consider: C corporations are now taxed at a 21 percent rate, they are subject to double taxation, and there are no deductions for dividends. S corporations, on the other hand, are subject to the personal tax rate, which can be as high as 37 percent; however, most pass-through entities qualify for a 20 percent deduction which lowers their effective tax rate to 29.6 percent.
Mall stressed that bankers need to be clear about the strategy for their bank before they consider the incorporation status that works for them best. “What is your long-term strategy? That is the most important question,” Mall said.
Bankers who want to build up retained earnings in the bank for acquisition or other use, may benefit from the C corporation status, whereas bankers who prefer to pull income out of the bank as it is earned, may find the S corp status works best.
Mall said: “If you are distributing less than 20 percent of your earnings, you might be better off in a C corp.”
All the speakers, however, cautioned that no decision should be made lightly since an election one way or the other is not changeable for five years. Monroe further cautioned that it is difficult to predict what Congress will do. He said Congress may change the tax rules again, further complicating the S corp versus C corp question.