Posted on 11/14/2008 8:59:18 AM PST by laxcoach
My CPA has been warning me about something for a couple of months. I cannot find a url source for any of this. She says that in CPA seminars they have been telling her that s-corp rules will change with 2 years.
Here is the background. S-corps are used by most small businesses to limit personal liability and to take some income as dividend disbursements in order to avoid FICA/Medicare (13% after tax write offs).
According to the seminar leaders, the ways and means committee in the house is working towards making s-corp dividend disbursements subject to FICA/Medicare under the same rules as wages. The exceptions are: 1) this only applies to service based income. Doctors, lawyers, CPAs, tech companies. 2) the 102,000-250,000 FICA "bubble" will apply to this income as well.
The "bubble" is Obama's plan to remove the FICA wage limit, but make $102,000-$250,000 not subject to FICA. Everything below $102,000 (or whatever the cap is in that year) and everything above $250,000 will be taxed.
She is understandably worried about business in general. It's hard to imagine the effects on small service based businesses. Suppose a business nets $100,000. If they take $20,000 as wages, and $80,000 as dividends, they will be paying an additional net taxes of $10,400. That hurts.
To go a step further, consider a doctor making $500,000. For everything over $250k, they will have 13% extra taxes for FICA/Medicare + 5% for Obama's tax increase, plus the base of 35% taxes. That is 53% before state taxes. At some point, taking home $0.40 on the dollar isn't worth the increased liability.
Have any other CPAs heard these things? I've been searching the web and I can't find any articles about it. But I trust my CPA. She's my mom. She's successful and smart.
I find it hard to believe the government could get this passed into law because the impact on small businesses making less than $250k will be huge considering FICA implications.
That’s me and you’re right it will hurt.
The Dems solution to the FICA crisis is to tax the hell out of us until our society is bankrupt....and they call privatization ‘risky’. Unfortunately, our side had no message to combat the left in 2005 when Bush tried to reform SS. Hopefully, we are ready this time.
Fiddling with the S Corp advantages would be devastating to small business. Anyone who understands the motivations of producers would see instantly that this will reduce revenues through either (1) Greater use of CPAs and Tax Attorneys to legally avoid taxes (2) Greater incentive to hide income illegally (3) Atlas shrugging - less incentive for producers to work or expand their businesses.
Hey Rip Van Winkle - did you just sleep through the last six months?
There are now more leeches in our society than there are producers, and, just ten days ago, the leeches voted themselves all the goodies.
If, at this late date, you are still so dangerously naive as to believe that "the government" can't "get this passed into law", then kindly allow me to inform you that you don't have any earthly idea how bad things are about to become.
Ouch!
I believe they want to socialize our country and remove our freedoms. God help us all. We need to fight this somehow.
You nailed it. While my business is an LLC, not an S-Corp, the more gov't increases taxes the more I'll just manage things throughout the year so as to minimize my profits.
I guess I’ll just have to stroll through the parking lot and fire everyone with an Obama sticker on their vehicle.
My guess is that we'll see more compliance enforcement before we see a wholesale dismantling of “S” corp’s. Also, keep in mind that the biggest source of lost tax revenue is not with Sub “S” Corp’s but rather with fraudulent Schedule C's. Underreported income and overreported expenses on Sch. C are thought to account for as much as 600 Billion dollars in uncollected tax revenue each year.
In my practice I see audits on Sch. C and E something like 100-1 over 1120S audits and the audits have been increasing every year. Also, anyone filing Sch A had better make sure that they have their documentation together. I'm seeing a lot of audits on Medical Expenses and Unreimbursed Employee Expenses.
Would the alternative be an LLC? At least with that, you are only liable for half the FICA.
Damn, I’m a 30 year owner of a Chapter S Corporation. Construction business with 14 employees currently. I take a $1,000 per week salary on which I pay FICA, etc., but the bulk of my income is reported on a K-1 as a dividend/distribution. I’ll be extremely displeased with any change to the current Chapter S tax situation. Maybe I’ll just fire the employees and go on the dole.
Disbursements ARE NOT dividends. Disbursments are taxed as regular income on your personal 1040. Dividends are not. Do not confuse the two.
Of course, if the democrats change the rules for S corporations, they will probably do it for limited partnerships too.
There is very sound tax logic for the S corporation and limited partnership exception to self-employment tax. It is NOT a loophole by any stretch of the imagination. Are some people abusing it? Yes, just as people abuse lots of deductions, credits, etc. But that is no reason to do away with it. In fact, that would be stupid and worse than the abuse.
What this is really about is just another excuse to raise taxes on where the money is at: small businesses. The democrats do not want to call it a tax increase, so they play with words and call it closing loopholes. I guess the fact that I am not taxed on the air I breath is a loophole as well in the eyes of democrats. They will probably close that loophole as well.
I rely on my accountants recommendations as to what is a“reasonable” salary. I report every penny I take in, as to expenses, I keep mine to a bare minimum and don’t fudge at all.
I think it’s much like the old Home Office exemption. At one time, you could get away with murder, but then the IRS clamped down on it, and virtually anyone who claimed a home office exemption got audited.
I was audited three years in a row. One time I went into the IRS office (I would never let any IRS guy into my house, on general principles). We went through all my paperwork for about three hours, and he ended up collecting an extra $10 in taxes. But at that point I gave up doing the home office bit. It didn’t save enough to be worth it, and it meant that your whole tax report would be audited, from one end to the other.
However taxes will be going up. (Hey, pie is expensive, and Obama has promised his people pie.) How and where, I don't know, and anyone who says they do is a liar. But S-Corp dividends is a real possibility for tightening. Stay tuned.
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