Types of Corporations and the Rise of the Tax Accountant

Types of Corporations and the Rise of the Tax Accountant

Tax accountants are increasingly relied upon for organizational strategy as technology helps them step away from data entry

The accounting field is changing quickly. As you can read in our article about the future of accounting, accounting “grunt work” and data entry are on the decline. Accountants today need to be ready with a new set of skills compared to accountants of the past.

The role of a tax accountant, for example, is undergoing a fundamental shift in focus due to the rise of cloud computing and the ability to process massive amounts of data with less effort. These technological advancements are helping distinguish the role of the tax accountant as a lead business strategist within an organization.

“Tax accounting will continue to shift more toward an advisory role in a business, says Michael Donohoe, an associate professor of accounting in the online MS in accounting program (iMSA) and PwC Faculty Fellow at the University of Illinois’ Gies College of Business, “Data entry work will likely become more of a thing of the past with clients entering data themselves through a cloud-based service. We’ll also see tax accounting and data analytics merge in a way that allow accountants to focus more on planning, efficiency, and organizational structure.”

Donohoe is a leading expert on tax accounting strategy, including how competition affects firms’ decision to become an S-corp vs. a C-corp (for example). With their time freeing up thanks to from more automated processes, tax accountants can spend their time considering strategies associated with answers to questions like these.

Donohoe and fellow colleagues have pioneered research on how competition from tax-advantaged firms influences the behavior of tax-disadvantaged firms, specifically when it comes to organizational form choice. This research is important to the fundamentals of a firm’s strategy. With their time freeing up thanks to automated processes, tax accountants can spend their time considering the strategies associated with these types of issues.

Donohoe posits that tax accountants can and should be more focused on advising organizational-level strategy, like helping advise on organizational form choice. If you plan on becoming an accountant, CPA, or leading a business — or you already are doing one of these things — Michael’s research on organizational form is well worth your time.

It’s part of the reason that continued learning is important in the field of accounting. Degrees like the online masters in accounting (iMSA) are important for professionals to consider. Below, we’ve included the answers to some basic questions you might have, particularly if you haven’t heard Professor Donohoe discuss the topic:

Should your firm be an Scorporation or a C-corporation?

Before making a decision like this, it is important to understand the basics. What’s the difference between an S-corp and a C-corp?

What is an S-Corporation?

S-corps are pass-through tax entities. They file an informational federal return (Form 1120S), but no income tax is paid at the entity level. The profits and losses of the business instead “pass-through” the business and are reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.

What is a C-Corporation?

C-corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends (which are considered personal income). Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.

What should you consider as an accountant deciding organizational form?

Donohoe has plenty of thoughts on this, but he is informed by his research on how competition affects the entity’s choices within an industry. As a tax accountant or business leader, this is another way of getting into the mind of your competitors to understand their current or future behavior.

Donohoe has clear, simple advice for anyone deciding on whether their firm should be an S Corp or a C Corp.

“Tax is not the only thing that matters in organizational form. When I talk to my students in the online masters in accounting program, we talk about tax factors — sure — but we also spend a lot of time discussing non-tax factors related to this decision. Things like a future IPO can dramatically change the approach a business should take regarding organizational form choice.”

These are the sorts of topics that are important for today’s tax accounting classes. Tax accountants, and accountancy in general, will continue to become important strategic advisors within business organizations. Organizational form is just one example of this foray into strategic decision making for accountants. So long, data entry!