An Analysis of the S Corporation Election After the Tax Reform Act of 1986.

The Tax Reform Act of 1986 reduced tax rates for corporations and individuals. It also increased the cost of liquidating a corporation because of the repeal of the General Utilities doctrine. This research analyzes mathematically the difference in cost between operating as a regular C corporation and as an S corporation. The surprising conclusion is that almost all new corporations that are qualified to do so should elect S corporation status. This is true even if the corporate tax rate is below the shareholders' individual tax rate and even If dividends are paid during the life of the corporation. In general, the only new corporations that ultimately may be better off as C corporations are those that pay tax at a low rate relative to their shareholders and, in addition, will remain In existence for a very long period of time (generally at least ten years or more) or until the death of the shareholder-owners.