The Tax Cuts and Jobs Act of 2017 made a big change to corporate tax rates. Before the Act, corporate tax rates were progressive, topping out at 35% for higher levels of taxable income. The TCJA transformed that into a flat 21% rate on all corporate taxable income. § 11(b).
At the same time, the top individual marginal rate dropped only slightly – from 39.6% to 37%. As the Kratzke casebook notes, the spread between the top corporate and individual rates jumped from about 4.6 percentage points to 16 percentage points. That gap means there’s a renewed incentive to keep earnings inside a C corporation, where they are taxed at the lower 21% rate, rather than distributing them as dividends taxed at individual rates.
But the Code pushes back against indefinite corporate hoarding. Two weapons Congress has long wielded are the personal holding company tax (PHC) under §§ 541‑547 and the accumulated earnings tax under §§ 531‑537. The Fulman case described the PHC tax as “a penalty tax” designed to force distributions of earnings that would otherwise accumulate tax‑free at the corporate level. Fulman v. United States, 434 U.S. 528, 531 (1978).
So while the lower corporate rate makes retention attractive, you have to be careful not to run afoul of these penalty taxes. A good tax advisor will help you balance the desire to defer income against the risk of triggering an accumulated earnings or PHC examination.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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