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Editorial 6 MIN READ

The C-corp at the end of 2022: vanilla, and no longer obvious

Five years after TCJA flattened the rate to 21 percent, the C-corp case is mostly an exit case

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. What 2017 changed, and what stuck
  2. The two new federal taxes, and who they actually hit
  3. The bonus-depreciation cliff and the § 174 surprise
  4. QSBS remains the reason to pick C-corp
  5. Where the C-corp actually fits now
  6. Sources

C-corp in December 2022 pays a flat 21 percent federal rate on taxable income under IRC § 11(b), and the shareholders pay again when money comes out. That second layer is the whole argument, and the argument has moved twice in the last four months.

The Inflation Reduction Act, signed August 16, 2022, added two federal taxes that land on C-corps specifically. Section 174 is in its first year of forced capitalization. Bonus depreciation begins its phase-down in thirteen days. None of this kills the C-corp; most of it just makes the choice less automatic than it was in 2018.

What 2017 changed, and what stuck

The Tax Cuts and Jobs Act (Pub. L. 115-97, enacted December 22, 2017) replaced the old graduated corporate schedule (which topped at 35 percent) with a single 21 percent rate under IRC § 11(b). That rate has not moved and, unlike the individual provisions, is not scheduled to sunset. Unless Congress acts, a C-corp formed today pays 21 percent on taxable income in 2023 and beyond.

The 20 percent qualified-business-income deduction under IRC § 199A was added for passthroughs, explicitly to narrow the gap. The relevant arithmetic has not changed since 2018. At the top bracket, a dollar of C-corp profit pays 21 percent at the entity level, and if distributed as a qualified dividend another 20 percent under IRC § 1(h)(11), plus 3.8 percent Net Investment Income Tax under IRC § 1411 where the shareholder clears the threshold. That is 39.8 percent all-in on distributed earnings. A top-bracket S-corp owner running the same dollar through § 199A pays roughly 29.6 percent (37 percent individual rate times 80 percent of the income). The passthrough still wins on annual distributions.

The two new federal taxes, and who they actually hit

The Inflation Reduction Act added IRC § 55(b)(2), a 15 percent corporate alternative minimum tax on adjusted financial statement income, effective for tax years beginning after December 31, 2022. It applies to corporations whose three-year average AFSI exceeds $1 billion. Most founders will not hit it. The reason to know about it at all is that venture-backed companies on a growth curve can reach AFSI thresholds before taxable income does, because book income and taxable income diverge on stock-based compensation, GAAP revenue recognition, and depreciation. The CAMT does not reach down to $50 million companies. It reaches some of the companies those $50 million companies hope to become.

The second new levy is IRC § 4501, a 1 percent excise tax on the fair market value of stock repurchased by a publicly traded corporation, effective for repurchases after December 31, 2022. It hits buyback programs, not ordinary redemptions in a private company; a closely held C-corp buying out a retiring founder is not the target. The rule matters for this audience as context: the federal government has priced the buyback-versus-dividend arbitrage at 1 percent. Small, and also a precedent.

The bonus-depreciation cliff and the § 174 surprise

IRC § 168(k) allowed 100 percent expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. The phase-down is written into the statute: 80 percent for property placed in service in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and zero in 2027. Any equipment purchase a capital-intensive C-corp is considering in the last two weeks of this year gets a 100 percent deduction. The same purchase delivered January 3 gets 80 percent. For a business buying $500,000 of qualifying equipment, that is $100,000 of deferred deduction across the calendar boundary, worth roughly $21,000 in federal tax at the corporate rate.

The § 174 change is less visible and more annoying. TCJA rewrote § 174 so that, for tax years beginning after December 31, 2021, specified research and experimental expenditures can no longer be deducted when paid. They must be capitalized and amortized over five years for domestic R&E, fifteen for foreign R&E. Software development is explicitly captured. 2022 is the first return in which this bites. Engineering-heavy startups expecting a loss will instead report income, owe tax, and learn about this from their CPA in February.

QSBS remains the reason to pick C-corp

IRC § 1202 is the provision that keeps the C-corp case alive for founders who are building a company to sell. Qualified small business stock acquired at original issuance from a C-corp with gross assets of $50 million or less, held for more than five years, excludes gain on sale up to the greater of $10 million or ten times the shareholder's basis. For stock acquired after September 27, 2010, the exclusion is 100 percent; the rate was made permanent by the PATH Act of 2015.

The dollar value of this exclusion is the largest single number in founder tax. A $10 million gain on C-corp stock held five years, with a basis near zero, taxed at the 23.8 percent federal long-term capital gains plus NIIT rate, would otherwise cost $2.38 million. Under § 1202 it costs zero. A $40 million gain with a $4 million basis, where ten-times-basis is the operative cap, excludes the full $40 million. None of this math runs if the company elected S-corp or stayed an LLC treated as a partnership. Only C-corp stock qualifies.

The §1202 trap people miss: the five-year clock starts at issuance, not at incorporation, and a conversion from an LLC to a C-corp starts a new clock for stock issued at the conversion. A founder who forms as an LLC in 2022 and converts in 2025 has effectively given up three years of holding period for stock that would otherwise qualify. If QSBS is on the table, forming directly as a C-corp costs almost nothing and preserves the clock. See the Delaware formation guide for the underlying filing mechanics; the entity choice sits on top of that plumbing.

Where the C-corp actually fits now

Three profiles belong in a C-corp at the end of 2022.

The first is anything headed for institutional venture capital. Funds with tax-exempt LPs and foreign LPs will not invest in a passthrough; UBTI and ECI concerns foreclose it. A Delaware C-corp is the price of entry, and starting there preserves QSBS from day one.

The second is a capital-intensive business that reinvests. Every dollar that stays inside the C-corp is taxed once at 21 percent, versus 29.6 percent for a top-bracket passthrough owner. About 8.6 percentage points on each reinvested dollar, compounding. The second layer of tax appears only when the money comes out, and for an acquirer-bound founder it comes out at QSBS rates, which is to say at zero up to the cap.

The third is a business with non-citizen or institutional owners who cannot be S-corp shareholders. IRC § 1361(b)(1) limits S-corp shareholders to U.S. citizens and residents, certain trusts, and a short list of exempt organizations. A single non-resident co-founder ends the S-corp option. C-corp has no such constraint.

Everything else, the operating consultancy, the real-estate LLC, the one-owner software shop with no intention of raising, still belongs in a passthrough. The C-corp's 2022 case is almost entirely a future-sale case.

The deadline worth marking on a calendar right now is December 31. Equipment placed in service by that date gets the last full year of 100 percent bonus depreciation. January buyers will pay the phase-down in real dollars.

Sources

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