Are Pennsylvania and New Jersey Construction Companies Paying Too Much in Taxes?
2/10/2014 | Construction Blog
With tax season looming, many are beginning to assemble their papers, talk to their accountants, and make decisions about how best to pay Uncle Sam. In this context, some will be shocked to hear about data recently offered by the National Federation of Independent Businesses and other tax related groups that have studied effective tax rates. Pennsylvania and New Jersey developers and construction companies should certainly be aware of these facts and, perhaps, consider changing the manner in which their companies are organized from a tax perspective.
According to a recent study on tax rates in 2013, S corporations paid the highest effective tax rate last year. At 31.6%, companies organized in that fashion pay over a little less than 1/3 of their income in taxes. Partnerships were not far behind at 29.4%. On the other hand, the “old fashioned” C Corporation came in at approximately half the rate of S Corporations. Its rate of 17.8% seems miniscule in comparison. Finally, construction as an industry paid the highest effective tax rates in the entire country. This seems to relate to the fact that approximately 80% of construction companies operate as pass-through entities.
Based on economics alone, companies should be giving careful consideration to whether organizing as an S Corporation makes sense. There are certainly other facts that go into the evaluation – such as liability, flexibility afforded by each structure, and cost to organize and operate for example – but the significant difference in tax burdens could be hurting the bottom line. If you find that to be the case, perhaps it is time to talk to your attorney and accountant about making a change.