Did Congress just put the first nail in the coffin for service providers who operate in S Corporations?
Congress quickly passed a new bill called the American Jobs and Close Tax Loopholes Act of 2010. The Senate still needs to pass it, but is expected to do so just as quickly.
It includes some tax extenders which were needed. And it extended unemployment benefits to November 30, 2010 for people whose benefits were running out.
And it pays for it all by hitting small business owners right where it hurts – in their S Corporation.
Here are the highlights:
- If you have a professional services S Corporation, your distributions will now be subject to 15.3% self-employment tax. This is on top of the payroll tax you’re already paying for salary you take from the S Corporation.
- The definition of ‘professional services’ is sufficiently vague to allow the IRS some wriggle room when the Code and eventually Regulations are written. This is an area we’re watching closely. At this point, assume if that if you provide any kind of professional service this is going to affect you.
- It is only applicable to S Corporations who have 3 or fewer shareholders whose “reputation and expertise” are used in the company.
This is clearly a bill that is targeted at ONLY small business owners who are service providers.
Remember it’s not law yet. And if enacted it doesn’t become effective until January 1, 2011. There is a tiny window available for planning.
This week we’re going to look at how this works with other new taxes coming your way thanks to the Health Care Bill. And of course, what you can do about it.