Subchapter S Corporations

The Rightist Wing ^ | 10/24/2004 | Andrew DeWitt

[Soul_Golem]

Subchapter S Corporations

Recently, I saw on Tucker Eskew's internet blog someone had posted this message in comments:

I have a small business and I keep hearing how Kerry is going to raise taxes for people over 200K and how that is going to hurt me.

Some Dem told me that it would only matter if I was a Subchapter S business where the AGI (Adjusted Gross Income) would be over 200K. He says that this is only about 1% of small businesses because most small businesses making over 200K are not classified as Subchapter S corporations. Can one of you help me debunk this?

Tucker Eskew

So I waxed up my web surfboard and went in search of her needed information. I came up with this reply:

What it sounds like this Democrat is mistakenly doing is singling out the Subchapter S case scenario amongst the tax increases because small businesses are an issue. Right now those businesses, most of which are small companies that are sole proprietorships, are allowed to pay at individual income tax rates rather than pay taxes as coporations. Check out this link if you haven't seen it already:

Kerry Wrong For the Economy

There are over three million Subchapter S businesses in the U.S. and Subchapter S reform is somewhat of its own hot little item. Check out these links:

Small Businesses Get A Taxbreak Too

Independent Community of Bankers

This on H.R. 4520:

Conference Documents for H.R. 4520
the "American Jobs Creation Act of 2004"

The issue is that instead of making government less costly for Subchapter S businesses it is more expensive if/when they are put in the same boat as larger corporations by double-taxing.

Now not just the majority of small businesses who qualify as Subchapter S corporations are sole proprietorships. A smaller fraction of small businesses affected still qualify:

Subchapter S (S Corporation)

1) Must be a domestic corporation
2) Must not have more than 75 shareholders
3) Must include only eligible shareholders
4) Must have only one class of stock

I have seen this infinitesimal number of it being only 1%, and I have seen 1.5%, but only on forums where there was less discussion than there was pea-shooting. I dug up this link in a Google search to provide you with a better read to help explain this:

S Corporation Returns, 1999 - Statistical Data Included

It says that for 1999 over 55.2% of all businesses filed tax returns as S corporations.

So 1% no, but I know where the 1.5% came from though. S corporations pay 1.5% personal property tax replacement income tax. Just look at this:

Business Income - Subchapter S

So, just how these kinds of rumors get started becomes a little bit self-evident if one only takes a bit of a closer look. Apparently, taxing these small businesses would be a catastrophe.

[Soul_Golem]

I wrote this article, but let me know if there is any information or links you all think might be helpful to this topic!

[sionnsar]

*	Welcome to FreeRepublic

[BoBToMatoE]

I run a subchapter s corp. sKerry's tax increase will KILL businesses like mine.

[Bonddad]

The central feature of a sub S corporation is its pass-through nature -- the income passes through the corporation and is taxed at the individual tax-payers income tax rate.

[krb]

I started my company last year and I am a subchapter S corp. I cringe when Kerry talks about his economic "plan" even though I peronally won't be a >=$200,000 company for awhile, if I ever need to grow (and hence give other people jobs) his tax ideas will slow down or eliminate alltogether my ability to do that.

[krb]

the income passes through the corporation and is taxed at the individual tax-payers income tax rate.

In addition to the slightly simpler paperwork of doing it that way you have the fact that income is taxed only once, like it should be.

[Fiddlstix]

BTTT

[Always Right]

Now not just the majority of small businesses who qualify as Subchapter S corporations are sole proprietorships.

If you elect to become an S corp, you are no longer a sole proprietor. You are one or the other not both. Taxes from an S-corp flow through to an individual's tax return in the same way a sole proprietors does and there is no corp tax paid.

Kerry's proposal that is detailed in his budget actually calls out for a reinstatement of the top two brackets. This is the biggest tool Kerry uses to cut the deficit in half. The problem is, Kerry overstates the revenues generated by about 50% and this tax will also effect people earning as little as $80K.

[Ff--150]

read later

[Tuscaloosa Goldfinch]

We are a Sub S also. It works much better than a sole proprietorship, for us, anyway.

[rockman]

the problem is that the data is very obscure for sub-chapter s corps, most small businesses that use them, have good and bad years,(the old days) the income and losses flow through to the owners, shareholders. so, start up companies elect the s election and the losses flow through. today, many are used to hide, avoid paying medicare tax, 2.9% or $2,900.00 per $100,000 of income.

kerry's plan may do two things, one, raise the income taxes on over $140,000 but the other, make the distributions, ie income subject to social security and medicare tax

have a really good(sarcasm) day

[Hendrix]

I am a tax attorney, so let me clear this up.

All businesses (other than C corporations) pay their taxes on an individual tax return (the Form 1040), and this includes S corporation, limited liablity companies, partnerships, sole proprietors, many trusts, etc. The Kerry tax increase will hit S corporations, partnerships, limited liability companies, and sole propritorships.

These small businesses are not taxed under the Internal Revenue Code--the tax flows through to the owner's individual income tax returns.

Most people work for small businesses, and most jobs are created by small businesses--not to mention the multiplier effect on the economy that these small businesses produce. Plus, any time you raise taxes on anybody, you are pulling resources out of the private sector and thus fewer resources are able to help grow our nation's GDP (we all become poorer).

[gubamyster]

Some Dem told me that it would only matter if I was a Subchapter S business where the AGI (Adjusted Gross Income) would be over 200K.

This is a bunch of bull. I'm a CPA who has many clients who are S-Corps. We work it out so that very few (if any) of them have $200K remaining in the corp to come across to the personal tax return. That is good tax planning. Does that mean the taxpayer has an AGI less than $200K? Not necessarily. What if the taxpayer (usuall both husband & wife are officers of the S-Corp) pay themselves a salary combined of $200K? What if one spouse has income of $150K from outside the corp, the S-Corp pays the other spouse $50K and another $10K comes across on the K-1 from the corp?

The bottom line is that any CPA worth their fee will reduce the S-Corp income, probably below $200K, but the AGI on many individual taxpayers' returns can still be above $200K. Kerry's tax increase is going to hit a LOT of people.

[Hendrix]

Well, that just means that your clients have smaller S corporations or they have a lot of shareholders to spread the S corporation income around so that none of them get distributed $200k. But you have to keep in mind that even if they do not get 200k, they have to add that to their other income,which could put them in the top brackets. Bottom line: it discourages people from investing when they know a lot of the return is going to push them into the top brackets that are taxed too high so that their after tax return is not good enough for the risk of the investment.

[expatpat]

Some Dem told me that it would only matter if I was a Subchapter S business

Not true -- it will also affect sole proprietorships, LLCs, etc. (Any set-up where there is pass through of income to the individual).

[WHBates]

If you are a small business they (The Dem's) will target you (Type S or Type C). Why? Because that's where the money is. I guess most folk's are kidding themselves.

[Hendrix]

By the way, paying themselves 200k does not solve the problem and that is not good tax planning (it subjects all that compensation to the payroll tax). 200k of compensation is still put in the same top brackets (same as if it were a dividend from an S corp).

[Hendrix]

Bottom Line: the Kerry tax increase hurts all small businesses because the vast majority of them are paying tax on a 1040 (individual tax return as oppossed to a C corporatoin corporate tax return), and even the ones who are not in the 200k range will be taxed when they grow to the point that they are in that range. Plus, the multiplier effect (basic economics folks) of the businesses that will be hit is very big and not talked about.

[Hendrix]

Sorry Gubamyster, I misread your post. I agree that the Kerry tax increase is going to hit a lot of people and it is going to have a big negative effect on the growth of our economy. Anytime you pull money out of the private sector and put it in the public sector (the government), our GDP will be less and our standard of living will be less over the long run.

[Blacksheep]

I am sub-chapter S and take a salary that is substantially less than the income of the company. The remaining after tax profit I reinvest in the company in R and D new products capital equipment, etc. The government takes their piece even though I never take the money out of the company.

Then when I sell it, the Gov. takes another piece in additional income taxes, depreciation recapture and capital gains. I don't understand why we aren't taxed only when we take out the money. I could hire more people if my silent, worthless partner( IRS) didn’t come in quarterly and take his share.

Kerry raises taxes on $200,000.00 + and I won't be able hang on the cash to pay for my customers, that average about 90 day payment terms. I make it ship it and pay all the bills and taxes before I ever get paid for the product.

I don't know why the function of the S Corporation is such a mystery to the news media? This proposed increase is a strike at the heart of small business.