New Tax Law Set to Trigger Conversions From Pass-Through Entities to C-Corporations

Politico’s Ben White and Aubree Eliza Weaver write about the Penn Wharton Budget Model’s projection of business entity classification conversions in the aftermath of the Tax Cuts and Jobs Act (TCJA) in Morning Money: The Big Switch from Pass-Throughs. The TCJA is estimated to motivate 235,800 U.S. business owners to make the entity transition from a pass-through entity to a C-corporation to retain more income, especially encouraging those that can afford to defer business income to the next year.  Their article cites the Penn Wharton Budget Model’s brief on the projected mass conversion of businesses from pass-through entities to C-corporations due to the Tax Cuts and Jobs Act and the federal tax comparison calculator which takes owner inputs and compares the resulting 2018 average tax rates faced as a pass-through entity and C-corporation. They clarify, using  PWBM’s research, that while doctors, lawyers, and financial advisors will make up the majority of these transitions, others like plumbers and painters will remain as pass-through entities as they benefit from the 20% deduction for pass-through business income.