So for any of you small corporations with an S-election like our firm, it looks as though the government shut down our "Tax Loophole". Apparently Professional services such as Engineering and Architecture are now disqualified for taking the S election.
This should have been called the another way to crush small business act of 2010.
I was looking into the tax credits for small business health insurance and apparently you only qualify for that if you pay your employees (i.e. yourselves) less than 40k per year. That may have been a possibility before this new law, but now that seems to be a bad course of action as well. Especially when you have to provide audited numbers for government contracts.
Im not ready to become a Republican, but I am officially disavowing myself from the Democratic Party. Geeeeeeeeeesh!
P.S. The bill was sponsered by Mr. "Tax avoidance" Charlie Rangle himself. The irony.
Just to clarify.
Under the new subsection, an S corporation engaged in a professional service business would be a disqualified S corporation if the principal asset of the business is the reputation and skill of three or fewer employees.
So apparently it only targets small business.
Is Not Small The Whole Point Of An S Corporation ?
I guess I will not become one.
Paul in PA
Greg
I found blogs that talked about what you say. But it isn't on opencongress.org H.R.4213 - Unemployment Compensation Extension Act of 2010
I don't know about insurance credits, but we always deducted insurance expenses from earned income. The point of the law is tax fairness. From the quotes below, it appears that the bill had bi-partisan support.
The law in summary reads: PREVENT AVOIDANCE OF MEDICARE TAX BY PROFESSIONALS INCORPORATING AS S-CORPS - Some service professionals (lawyers and lobbyists) have been avoiding Medicare and Social Security taxes by routing their self-employment income through an S corporation. These taxpayers then pay themselves a nominal salary and take the position that the remaining earnings are exempt from employment taxes. The bill would address this abuse in situations where (1) an S corporation is engaged in a professional service business that is principally based on the reputation and skill of 3 or fewer individuals or (2) an S corporation that is a partner in a professional service business. The bill would also clarify that individuals that are engaged in professional service businesses are unable to avoid employment taxes by routing their earnings through a limited liability corporation or a limited partnership.
What People are Saying about Carried Interest and Tax Equity:
?To be clear, I hold no brief against the kings of private equity. Their clients are consenting adults who sign up with full knowledge of the lush fees that private equity managers receive. Some of these managers may even earn their rich rewards. My question is simply this: Why shouldn‘t they pay taxes like the rest of us? It‘s true that carry is mostly derived from gains on capital — but it‘s mostly someone else’s capital. Which is presumably why former Treasury Secretary Robert E. Rubin said at a conference last month, ?I think what they‘re doing is getting paid a fee for running other people‘s money.? Sounds right to me. This judgment does not dispute the fact that fund managers‘ compensation is risky. But so are the incomes of movie actors, the royalties of authors and the prize winnings of golfers — none of which is treated as capital gains.? – Alan Blinder, Princeton Economics Professor
?Whether it makes sense to tax the output of expertise and hard work at more than twice the rate of investment returns is debatable. But, for better or worse, that's the way it is. Except, that is, when it isn't. Owners of companies, ranging from small real estate partnerships to multibillion dollar hedge funds and private equity firms, have devised a way to erase this distinction. Their managers pay 15% on their income by dressing it up as investment returns — even though they bear no investment risk or put none of their own money in play. Nice work if you can get it. But in this case it constitutes a frontal assault on fairness. Why should such people pay only 15% when senior corporate executives pay 35% for making many of the same types of business decisions? More to the point, it's hard to see the logic (or the justice) in a school teacher or bus driver with taxable annual family income as low as $63,700 paying 25% when someone like Blackstone Group CEO Stephen Schwarzman can make nearly $700 million on the day his firm went public and pay at most 15%.? – USA Today
?Deferred compensation, even risky compensation, is still compensation, and it should be taxed as such… The Administration is on the wrong side of the issue [if it opposes the congressional legislation, which] does not seem excessive... When I wrote my book, that was sweat equity… different levels of taxation on different types of compensation.? – Gregory Mankiw, Harvard Economics Professor and Former Chairman of President Bush’s Council of Economic Advisors
?[T]he underlying question is whether the funds' managers are receiving income from an investment they have made, or a payment that is, in all but name, a performance-related fee… Much the larger part of what they typically receive is exactly akin to a performance-related bonus, not a reward for capital put at risk. To treat it otherwise for tax purposes is a gross distortion. Efforts are doubtless under way in other industries to disguise management fees as carried interest. Correcting this anomaly might be done in different ways… The simplest approach, and most likely the best, would be to set the question of deferral aside, and tax carried interest as ordinary income on realisation. To emphasise, this would not be to single out private equity or hedge fund managers as deserving of a new or specially punitive regime. It is a matter of even-handedly applying the logic of the present code.? - The Financial Times
?[The share of investment profits are] basically fees for managing other people‘s money.? - William Niskanen, Chairman of the Cato Institute & Former Member of President Reagan’s Council of Economic Advisors
?We believe that we are engaged primarily in the business of providing asset management and financial advisory services and not in the business of investing, reinvesting or trading in securities… We also believe that the primary source of income from each of our businesses is properly characterized as income earned in exchange for the provision of services.? - Blackstone Group, in an SEC Filing Associated with its IPO
?If you‘re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.... If you run a partnership and you have capital gains, you have a 15% tax rate; and if you run a corporation and have capital gains, you have a 35% tax rate. When both entities are operating in a similar manner with many thousands of shareholders, freely tradable shares, people managing them who are attempting to evaluate investments, it seems a bit illogical to have that sort of a spread in the tax rate just depending on form.? –Investor Warren Buffett
?…t seems to me that what is happening is that people who run a large fund are basically performing a service and the service is running the capital and as a consequence they get paid a fee in the form of a performance fee. You can characterize it as a performance fee, you can characterize it as a carried interest, you can characterize it any way you want, but basically I think what they're doing is getting paid a fee for running other people's money and if that is essentially what's happening, while you can certainly create all kinds of analogies that are complicated and if I were arguing against this I think I would try to develop a lot of complicated analogies and use that as my way of trying to prevent something from happening, I think at the core there is a very good argument to be made for treating this as ordinary income.? - Former Treasury Secretary Robert Rubin
?I think it‘s its odd that people making that much money off of essentially labor income should be paying lower rates than, than the average… than their secretaries are, to put it baldly. I think it‘s good that you are considering doing it. I think you have to be careful not to trap others in doing it. I think you are also on the right track when you‘re thinking about whether publicly traded partnerships ought to be taxed as corporations, since the corporations they are competing with are certainly paying tax at the corporate level, and there‘s some actual money in some of those areas.? - Michael Graetz, Former Deputy Under Secretary for Tax Policy under President George H.W. Bush, Yale Law Professor
?…[T]he bills‘ supporters rightly conclude that it is untenable for the most highly paid Americans to enjoy tax rates that are lower than those of all but the lowest-income workers. Fairness is not the only reason to change the rules. The private equity industry is on shaky ground when it claims that current practice is a correct application of the law. Many of the firms‘ partners are not investing their own money in the various funds and ventures, and so have no direct risk of loss, the general test for claiming capital-gains treatment on one‘s earnings….They‘re actively managing assets, and should be taxed accordingly as managers earning compensation… Congress will achieve a significant victory, for fairness and for fiscal responsibility, if it ends the breaks that are skewing the tax code in favor of the most advantaged Americans.? - The New York Times
?We can‘t allow the carried interest tail to wag the capital gains dog…. Contrary to the claims of some press reports, lobbyists, and politicians, our inquiry, and any proposal that it may produce, is not about raising taxes on capital income. It is not an attack on the investor class. It is about the definition of capital income versus labor income… I make this point to some Republicans and some Democrats who may have come down on this issue on opposite sides before they even know the facts.? - Senator Charles Grassley
“The bill would not affect the other investors in these funds, nor would it affect the tax rate for profits that fund managers make on investments with their own money… Critics of the two bills argue that investment fund managers should be rewarded for taking high risks. But these fund managers, for the most part, are not risking their own money… Besides, plenty of risky industries don't enjoy comparable tax benefits. Income earned from managing an investment partnership fund should be treated just like the income earned for providing any other service.? - The Washington Post
?[The current treatment of carried interest is] a policy mistake: It was earned by the work of promoters [in the private equity industry] and it should be taxed as compensation.?- John Chapoton, Former Assistant Treasury Secretary for Tax Policy Under President Reagan
show me where?
Currently, if your S corp makes $100k net. This net income is passed thru to the share holders. They pay taxes on the$100k at their personel income tax rate. There is no self employment tax due on the distribution. The S corp pays the employer portion of the emlpoyee taxes and you pay your portion on your wages. Now if you are saying that all net income is going to be subjected to self employment tax, then plenty of folks will be upset over that. Can you show me where the new law states that all net income for an Scorp is subject to self employment tax.
They have already closed the loophole on self employement taxation before by saying a share holder/owner has to apy themselves a wage/salary, that is subject to self employment taxes....
If the folks in Washington are now going to treat all NET income of an S corp as being subject to self employment tax instead of getting rid of carried interest, that is low. Probably time to become a C corp then.
