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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. This essay, the first of a two-part series, argues that there generally are no tax benefits from converting and investing in portfolio assets through a corporation. That is because the corporate tax on the invested income more than compensates for the deferral of the individual level tax on that income. The second essay in this series extends the argument to consider other provisions in the tax law that could potentially change that result and argues that any benefits from converting from a passthrough entity to a C corporation at present are modest at best.


Federal income taxation, tax reform, Tax Cuts & Jobs Act, TCJA, passthrough entities, mass conversion, C corporations, comparison, top statutory tax rates, rate changes, passthrough deduction, deferral of income, consumption and investment with different entities, basic and tax equivalence

Publication Title

Tax Notes

Publication Citation

Tax Notes, March 4, 2019, at 977.