By: John S. Morlu II, CPA
One of the most important decisions for a business owner is selecting the right type of business entity. The choice between a C corporation (C corp) and a pass-through entity (PTE) like an S corporation or LLC can have significant tax implications. To make an informed decision, it’s crucial to understand the tax rates and how they apply to different types of income. Let’s explore the factors and numbers that influence this choice in 2024.
Understanding 2024 Tax Rates
The following tables outline the key tax rates for 2024. These rates provide a foundation for comparing the tax burdens of C corporations and pass-through entities.
Corporate Tax Rate
| Tax Rate | Applicable to |
| 21% | All taxable corporate income |
The flat 21% rate for C corporations is straightforward and relatively low compared to individual rates, making it an attractive option for businesses with substantial profits that will be reinvested.
Individual Income Tax Rates
Individual tax rates for 2024 depend on filing status and taxable income. Pass-through entities transfer income directly to the owners, who pay taxes based on these rates:
| Table 1-3: 2024 income tax rates — Individuals | |||
|
Rate |
Taxable income starting at | ||
| Single individuals | Married filing jointly | Heads of household | |
| 10% | 00 | 0 | 0 |
| 12% | $11,600 | $23,200 | $16,550 |
| 22% | $47,150 | $23,200 | $16,550 |
| 24% | $100,525 | $201,050 | $100,500 |
| 32% | $191,950 | $383,900 | $191,950 |
| 35% | $243,725 | $487,450 | $243,700 |
| 37% | $609,350 | $731,200 | $609,350 |
These progressive rates can make pass-through entities more tax-efficient for lower to moderate-income levels, but higher earners may face higher individual tax rates compared to the flat corporate rate.
Capital Gains Tax Rates
Long-term capital gains (LTCG) rates apply to profits from assets held for more than a year, including stocks or business interests. These rates are lower than most ordinary income rates:
| Rate | Single Taxable Income | Married Taxable Income | Heads of Household Taxable Income |
| 0% | Up to $47,025 | Up to $94,050 | Up to $63,000 |
| 15% | $47,026–$518,900 | $94,051–$583,750 | $63,001–$551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
Pass-through entities allow owners to benefit directly from capital gains rates when they sell a business interest, while C corporations face potential double taxation (corporate profits and shareholder dividends).
Net Investment Income Tax (NIIT)
High-income individuals face an additional 3.8% NIIT on investment income, including pass-through income, above these thresholds:
- Single/head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
Factors to Consider When Choosing an Entity
1. Tax Rate Comparison
- C corporations: Benefit from a flat 21% rate but face double taxation when profits are distributed as dividends. For businesses reinvesting most profits, this low rate can be advantageous.
- Pass-through entities: Avoid double taxation by passing income directly to owners, who pay based on individual tax rates. For owners in lower tax brackets, this can result in significant savings.
2. The Qualified Business Income (QBI) Deduction
Pass-through entities may qualify for the QBI deduction (Section 199A), which allows up to a 20% deduction on qualified income. This effectively reduces the taxable income for PTE owners, making pass-through taxation even more appealing. However, eligibility depends on factors such as the type of business and income level.
3. Treatment of Fringe Benefits
C corporations offer more favorable treatment for tax-deductible fringe benefits. Shareholder-employees in C corporations can receive benefits like health insurance and retirement contributions without them being taxed as income. In contrast:
- S corporation shareholders owning more than 2% must include the value of certain benefits in their taxable income.
- LLC members and partners must treat benefits as guaranteed payments, which are taxable to the recipient.
When to Choose a C Corporation
- Reinvesting Profits: If the business plans to reinvest most of its earnings instead of distributing dividends, the 21% corporate rate can maximize cash flow for growth.
- Attracting Investors: C corporations are often preferred by investors and venture capitalists because they allow for multiple classes of stock and unlimited shareholders.
- Offering Benefits: Businesses that prioritize offering robust fringe benefits to employees may find C corporations more advantageous.
When to Choose a Pass-Through Entity
- Avoiding Double Taxation: For business owners who plan to take distributions, pass-through entities allow income to be taxed once at the owner’s individual rate.
- Maximizing Flexibility: LLCs offer the flexibility to choose taxation as a partnership, S corporation, or C corporation depending on the business’s needs.
- Taking Advantage of QBI Deduction: Pass-through entities enable eligible owners to benefit from the 20% QBI deduction, reducing their effective tax rate.
Making the Choice
Choosing between a C corporation and a pass-through entity involves evaluating both current tax savings and long-term goals. While the 21% corporate tax rate is appealing, double taxation and reduced flexibility may offset its benefits for many small businesses. Pass-through entities often provide greater tax efficiency for individual owners, especially when combined with the QBI deduction.
Ultimately, the right choice depends on factors like the business’s profitability, reinvestment needs, and owner goals. Consulting a tax professional can help ensure you make the best decision for your unique circumstances.
Author: John S. Morlu II, CPA
John Morlu II, CPA, is the CEO and Chief Strategist of JS Morlu, a globally acclaimed public accounting and management consulting powerhouse. With his visionary leadership, JS Morlu has redefined industries, pioneering cutting-edge technologies across B2B, B2C, P2P, and B2G landscapes.
The firm’s groundbreaking innovations include:
• ReckSoft (www.ReckSoft.com): AI-driven reconciliation software revolutionizing financial accuracy and efficiency.
• FinovatePro (www.FinovatePro.com): Advanced cloud accounting solutions empowering businesses to thrive in the digital age.
• Fixaars (www.fixaars.com): A global handyman platform reshaping service delivery and setting new benchmarks in convenience and reliability.
Under his strategic vision, JS Morlu continues to set the gold standard for technological excellence, efficiency, and transformative solutions.
