The IRS is on a mission to catch people doing this, and they have tried to close it off. In the 1990’s the IRS proposed a regulation that would have subjected the distributions from S corporations to self employment tax. The speaker of the house sent them a stern rebuke, told them that Congress passes tax laws, not the IRS. That speaker was none other than Newt Gingrich, who seems to have a special affection for that particular loophole.
“That speaker was none other than Newt Gingrich, who seems to have a special affection for that particular loophole.”
It’s not a loophole, it was the intent of the law. It’s in line with investment income not being considered wages. I don’t agree with it - I think a person like Mitt should have to pay tax on his as well, but that’s the way it was set up. (for obvious reasons)