The TCJA and the Questionable Incentive to Incorporate, Part 2

Tax Notes, March 25, 2019, p. 1447.

U of Penn, Inst for Law & Econ Research Paper No. 19-15

17 Pages Posted: 22 Apr 2019

See all articles by Michael S. Knoll

Michael S. Knoll

University of Pennsylvania Law School; University of Pennsylvania Wharton School -- Real Estate Department

Date Written: March 25, 2019


The Tax Cuts and Jobs Act (TCJA) has put the question should a business be organized as a passthrough entity or as a corporation at center stage. The TCJA eliminated much of the tax disadvantage from using the corporate form, but did Congress go so far that it advantaged corporations relative to pass-through entities? Some prominent commentators say yes. They argue that the federal income tax now encourages individual owners of pass-through businesses to restructure their business as subchapter C corporations, and they predict that the TCJA will lead to a cascade of incorporations. The principal driver of the shift to the corporate form is said to be high-bracket owners of successful businesses using their new corporations as “pocket books” through which to invest in and hold portfolio assets that they would otherwise hold on personal account. The benefit is the deferral of the personal tax on such income and hence a reduction in the present value of that tax. The first essay of a two-part series argues that there generally are no tax benefits from converting and investing in portfolio assets through a corporation because the corporate tax on the invested income more than compensates for the deferral of the individual level tax on that income. This essay, the second essay of a two-part series, extends the argument to consider other provisions in the tax law that could potentially change that result. After considering a range of other tax provisions and other possible drives for incorporation, this essay argues that any benefits from converting from a passthrough entity to a C corporation at present are modest at best.

Keywords: Federal income taxation, tax reform, Tax Cuts & Jobs Act, TCJA, passthrough entities, mass conversion, C corporations, comparison, statutory tax rates, rate changes, passthrough deduction, potential tax advantages of incorporation, business reinvestment, tax risk from incorporation

JEL Classification: H25, K34

Suggested Citation

Knoll, Michael S., The TCJA and the Questionable Incentive to Incorporate, Part 2 (March 25, 2019). Tax Notes, March 25, 2019, p. 1447., U of Penn, Inst for Law & Econ Research Paper No. 19-15, Available at SSRN:

Michael S. Knoll (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)

University of Pennsylvania Wharton School -- Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

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