Magazine article American Banker

Conversions to S-Corp Status Expected to Climb

Magazine article American Banker

Conversions to S-Corp Status Expected to Climb

Article excerpt

The stream of banks converting to S corporations will rise in the next 10 years -- maybe to flood proportions, if laws are passed to make conversion easier -- according to a study released Tuesday by Grant Thornton LLP.

Four bills are pending that would affect S corporations. But even if they do not become law, lower personal tax rates will make the structure more attractive, says the Chicago accounting, tax, and management consulting firm.

Instead of paying the federal corporate tax, S corporations pass along earnings to shareholders, who then owe personal income taxes on the income. As a practical matter, however, S corporation banks typically subtract the amount owed and pay the Internal Revenue Service directly.

"The new tax law will make the S-corporation election more attractive each year as the differential between the top individual tax and the top corporate tax rate declines," Grant Thornton says.

If an S corporation bank "is making a lot of money, your shareholders may pay 39.6%," now the top personal tax rate, said John R. Ziegelbauer, a co-author of the study who is a tax partner with the firm.

The corporate tax rate is 35%. "That 4.6% differential can be pretty substantial," Mr. Ziegelbauer said, but it will narrow as the personal tax cuts enacted this year are phased in.

This year already looks like a big one for becoming an S corporation. In the first quarter 203 banks converted; only 172 did in all of last year. …

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