The enactment of the Tax Cuts and Jobs Act (TCJA) has renewed interest in the traditional corporate tax structure. The entity commonly known as the C Corporation; is taxed separately from its owners at both the Federal and State levels. The resulting second level of taxation on shareholder dividends, has stymied their use in the recent past. Although TCJA has not eliminated the double taxation, it has created a strong incentive for inventory-dependent industries to consider the option anyway. The most significant change under TCJA in this regard, is the 40% reduction of the corporate income tax rate from 35% to 21%. This allows the reinvestment of undistributed profits at a substantially lower current tax cost than a comparable pass-through structure would provide.

The creators of TCJA did not completely favor the corporate form and provided a 20% tax deduction for pass-through entities to somewhat level the playing field. This results in a theoretical highest tax rate of 29.6% for pass-through businesses. While 29.6% is still greater than 21%, the benefit of avoiding any future taxation would likely outweigh the loss in current cash flows.

Two considerations remain that tilt the scale in favor of the corporate arrangement. First, the 20% pass-through deduction has significant limitations. Specifically, web-based retailers (Amazon, EBay etc.) and businesses involved in real estate refurbishment (flipping), have small amounts of payroll relative to income and little or no depreciable assets. Under the limitation rules, to receive the full benefits of the pass-through tax deduction, either substantial wages or depreciable assets must exist. Second, TCJA limits the ability of individuals to deduct state-level taxes paid to $10,000 annually. Corporations are not capped and are allowed a full deduction for all state-level taxes paid. This creates additional cash flow advantages for corporations in higher tax jurisdictions. Assuming ineligibility for the 20% pass-through deduction and increased effective state tax rates, the resulting reduction in cash flow could exceed 18% of profits. For a business carrying substantial inventory, a corporate structure now affords substantially improved cash flows and the ability to accelerate growth.