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The 20 percent corporate tax rate in both the House and Senate tax bills creates a huge benefit for growing companies that are reinvesting earnings. Businesses now taxed as flow-throughs — which includes S corporations and entities taxed as partnerships, such as LLCs — may stampede to become so-called C corporations if and when the pending tax legislation is enacted.

Most privately owned businesses have migrated to flow-through tax status in the last 20 years primarily to avoid the double tax regime for C corporations. Current tax law imposes a small penalty on flow-through owners for avoiding double tax, i.e. a 39.6 percent rate for individuals versus a 34-35 percent rate for corporations on current earnings (and a combined double tax burden in excess of 50 percent). But the pending tax legislation may materially change this, making C corporation status irresistible, particularly for fast-growing enterprises.

The Senate and House tax bills have very similar structures, making enactment very likely, but the bills vary in important ways. What happens in the midnight political knife fight to arrive at a final bill may determine which direction a business should go.

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