How will tax reform change the importance of a California Professional Corporation for those who are licensed professionals in the State of California? A California Professional Corporation or PC provides specific advantages to those with an entity comprised entirely of professionals including but not limited to:
- Doctors
- Dentists
- Architects
- Engineers
- Lawyers
- Veterinarians
You must be a “licensed person” in California in order to become a shareholder, officer, director or employee. This designation applies to those who are duly licensed under the provisions of the Business and Professions Code to render professional services. The California Professional Corporation (PC) may employ those who are not licensed, but they are not able to serve in any capacity or ownership within the PC and may not render services offered by the Professional Corporation.
While PC’s protect shareholders and officers from the malpractice or other liabilities associated with co-owners of the Professional Corporation, they may provide less limitation of liability for general issues such as slip and fall accidents and shareholder disputes. However, under the present law one of the primary advantages is owners of a PC are usually able to deduct payment for benefit plans, health insurance, benefit plans and even daycare. There is also an increased ability to contribute to retirement vehicles such as a 401(k).
The Senate version of tax reform proposes the reduction of the corporate tax rate to 20% beginning in 2019, as well as the elimination of the Alternative Minimum Tax (AMT). The plan also proposes a 4% deduction on qualifying business income earned by owners of pass-through businesses, resulting in a maximum marginal rate of 31.8% at the federal level. The bill proposes standardized contribution limits for employer retirement plans as well as taxation of non-qualified deferred compensation once it is no longer subject to a “substantial risk of forfeiture” (vesting).
The California PC was intended to provide additional protections and increased financial incentives for “licensed persons” in California. We invite you to contact the experienced healthcare law professionals at the Watkins Firm to learn more about the formation of a medical practice, healthcare entity or other entity for licensed professionals for a free consultation at 858-535-1511. Will tax reform change the importance of a California Professional Corporation (PC)? Trust your professional practice or healthcare entity to the proven professionals at the Watkins Firm.
