I put together a basic calculator to compare the tax costs of doing an acquisition as a pass through entity versus a C corporation.

(A pass thru entity is an entity that is taxed at the owner level and not separately at the entity level. Partnerships and S corps are the most common pass thru entities. Note, an LLC is usually treated as a partnership for tax purposes in the search context unless you choose otherwise.)

I may have made mistakes here (please LMK if you find them!) so you should always consult for your specific deal with your advisor (who may make mistakes too :).

A few initial notes here:

1) If you will qualify for the Qualified Small Business Stock exemption, you'll generally end up way better with a C corp, even if you distribute all cash flow every year. That said, whoever you sell to is likely to negotiate a lower price due to their not getting depreciation so some of the gain will be offset.

2) Otherwise, you’re generally somewhat better off with a pass thru entity (a partnership or S corp), and if your business qualifies for the 199A/Qualified Business Income (“QBI”) deduction, then significantly better off with a pass thru.

(An LLC is generally treated as a partnership, unless you elect otherwise. The QBI deduction is a 20% deduction for pass thru entities that aren’t certain services business like law, accounting, engineering etc. Other limits apply as well and many businesses can only get part of it.)

3) The combined federal tax rate for a pass through entity (sans QBI) is 40.8% before depreciation. If it’s QBI eligible, then the tax rate is 33.4% before depreciation, and 24.49% after. Compare that to a blended tax rate of 39.8% for a C corp before depreciation. (By blended rate, I mean the total federal tax paid both at the corporate level and shareholder level.)

While it seems the C corp rate is actually slightly better (without the QBI deduction), depreciation changes this significantly. The savings from depreciation are much lower for a C corp because depreciation is taken at the corporate level so it only shields gains at the 21% tax rate. For pass thrus, depreciation is taken at the same level as all the other taxes and shields gains at the full applicable tax rate. For example, a $4M purchase of a company with $1M in earnings, depreciated over 15 years, will result in an initial tax rate for a pass thru of 29.92% after depreciation (sans QBI) or 24.49% with the QBI deduction. Compare this to a C corp tax rate of 35.53% after depreciation on the same facts, for a 6-11% difference (though some of this difference may be mitigated down the line if there is recapture of depreciation upon sale).

State taxes could also make a material difference.

4) While reinvesting cash inside a C corp can mitigate the tax advantage of a pass thru (because the cash is only taxed at the corp level until distributed), it takes a long time (say 7-10 years), a lot of reinvested capital###-###-#### % of earnings), and a high return on invested capital (e.g. 20%+) for this to equal out.

5) If Kamala wins (which would likely be an economic calamity for small biz/ordinary folks due to more inflationary spending, heavy regulation, and poorly conceived big government intervention), all bets are off. Aside from new tax changes that may be pushed through (e.g., an increase in the corp rate to 28% from 21%), a number of the 2017 tax changes Trump pushed through, like the QBI deduction, expire automatically at the end of###-###-#### Not renewing them would be an easy move and take no legislative effort. If Trump wins, there’s a good chance things stay roughly similar. Yes, legal uncertainty makes business planning difficult (and undermines the reliability of law in general).

YMMV. Discuss with your advisor.

Comments and criticism welcome: --@----.com