Attention S-Corp Business Owners!
S-corporations like consulting firms, accounting firms, investment type firms ect. may have to pay all social security and Medicare taxes on their profits, whether they receive the profits or not! That means there would be less distributions allowed.
House Resolution 4213 “The American Jobs and Closing Tax Loopholes Act of 2010″ passed May 28, 2010.
This Act was passed to extend jobless benefits and boost infrastructure programs in an effort to stimulate the economy. Lawmakers are seeking to raise tax revenues to pay for these jobs initiatives by taxing the profits of S-Corps.
This bill is estimated to raise $11.249 billion over 10 years, and would help offset the cost of the various tax break extensions and unemployment benefit extensions in the bill.
This Act includes provisions to:
• Promote American job creation
• Provide relief for working families
• Prevent the outsourcing of American jobs
• Close tax loopholes
• Maintain access to affordable health care
• Ensure corporate accountability
How this act affects S-Corps
This act includes a provision, Section 413, intended to prevent service professionals from routing their self-employment income through an S corporation to avoid paying Social Security and Medicare taxes.
The provision applies to:
• Situations where an S corporation is engaged in a professional service business that is principally based on the reputation and skill of three or fewer individuals.
• Situations where an S corporation that is a partner in a professional service business.
• The provision would also clarify that individuals who are engaged in professional service businesses are unable to avoid employment taxes by routing their earnings through an LLC or a limited partnership.
“Unscrupulous businesses do use S corporation status to avoid paying their proper share of taxes and they should be caught and punished. But the Internal Revenue Service is already empowered to address that issue. This tax hike lumps together the good and the bad, penalizing thousands of honest small businesses that follow the rules. We strongly urge Congress not to support this inappropriate tax increase.” - George H. Miller, TheHill.com
More reading about The American Jobs and Closing Tax Loopholes Act of 2010
Read the full article on WebCPA.com:
http://www.webcpa.com/news/Accounting-Groups-Protest-S-Corp-Tax-Hike-54655-1.html
And on TheHill.com:
http://thehill.com/blogs/congress-blog/labor/101685-congress-and-the-s-corp-tax-hike
The Washington Post summarizes this Bill very nicely:
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/24/AR2010052403585.html