Question

What is a reason for cannabis businesses to switch from an S corporation to a C corporation O A. Remove cash from the business with no tax effect O B. To take advantage of a flow through business structure O C. To avoid increasing wages for shareholders O D. To take advantage of the reduced corporation tax rate of 21%

Answer 1

D. To take advantage of the reduced C corporation tax rate of 21%

Explanation:-

A C corp will pay 21 percent on its operating income, but its effective tax rate is determined by how much of its earnings are retained or distributed since shareholders are taxed on dividends paid by a C corp.

A C corp that distributes all of its earnings pays an effective rate of 39.8 percent, but a firm distributing half of its earnings will pay 30.4 percent. A C corp retaining all of its earnings pays an effective tax rate of 21 percent. Now those C corps retaining their earnings will have to pay them out eventually -- so the shareholders are not escaping tax altogether but simply delaying it into the future.

So, whether a firm plans to retain some or all of its earnings is a major consideration. Firms where owners are well paid in salary and can thus retain earnings to grow the business may favor a C corp structure.

Any company contemplating a change needs to develop long-term business forecasts, including the impact of various scenarios that could alter the tax picture.