The C corp that will get you double taxed

February 16, 2017
Karen E. Felsted, CPA, MS, DVM, CVPM, CVA
Karen E. Felsted, CPA, MS, DVM, CVPM, CVA

Dr. Felsted is a CPA as well as a veterinarian and has spent the last 15 years working as a financial and operational consultant to veterinary practices and the animal health industry. She also spent three years with the National Commission on Veterinary Economic Issues as CEO. She has written an extensive number of articles for a wide range of veterinary publications and speaks regularly at national and international veterinary meetings. She is the current treasurer of VetPartners, a member of the Veterinary Economics Editorial Advisory Board, a member of the CVPM board of directors and the current treasurer of the CATalyst Council. In 2011, she was awarded the Western Veterinary Conference Practice Management Continuing Educator of the Year and in 2014, the VetPartners Distinguished Life Member Award.Dr. Felsted enjoys exotic international travel, and when the dvm360 team last heard from her, she was headed to the Galapagos.

With changes in the tax code over the years, S corporation status is more attractive than C corporations for veterinary hospitals these days. Here's why.

Q. I incorporated my veterinary practice as a C corporation years ago. Do I need to change it?

The short answer is, yes.

Twenty years ago, there were some tax advantages to organizing your veterinary practice as a C corporation, particularly for health insurance and employee benefits. And when I researched C corporations recently, I found a ton of websites still saying that this structure is a great option for small businesses.

But I personally don't see it for the vast majority of veterinary hospitals.

The big issue is, C corporation profits are taxed twice: once at the corporate level and again when they're distributed to the owner. Before a C corporation practice is sold, the practice owners usually can manage their compensation so there's little taxable income at the corporate level. That's a big bonus to the owner. But when you sell the assets of the practice-and that's how a lot of 100% practice sales happen-it's not so easy to avoid that double taxation.

So, if you're still a C corporation, talk to your accountant about all of the ramifications. Do it soon; you can convert to an S corporation but there is a five-year waiting period before you can avoid all of the double taxation.