Tuesday Tax Time: the “OMG, This is A Scary Bill” Edition

The guvment is trying to stimulate us again, and they continue to un-stimulate us (in my opinion).  The House recently passed the American Jobs and Closing Tax Loopholes Act of 2010, and it is chocked full of tax extenders, relief for the unemployed and puts a hold on cutting Medicare payments to doctors.  The Senate will be voting on it soon.

But the section that makes me go “OMG” is the part that is attempting to undermine all the tax planning we as CPAs perform for our clients.  Some background: if you begin making a lot of money in your small business and you file as a sole proprietor, then you start having to pay a lot of taxes because you are running your business so well (in particular, the self-employment tax piece is the big deal-e-o).  But we as CPAs can guide you through the proper way to convert your entity to an S Corporation, begin taking a reasonable wage through payroll and then take out distributions that do NOT have self-employed tax charged to them.  This has saved our clients many many thousands of dollars throughout our firm’s history.

But this most recent bill passed by the House will charge self-employment tax to the distributions S corporation owners pull out above payroll!  This is amazing!  It’s for Professional Service Corporations, and it only applies to S Corps with 3 or fewer owners.  So if you run a service-based company inside of an S Corporation, your tax planning abilities are about to go away.  That really stinks.

Contact your Senator before they vote on this and tell them this is a killer to the small businesses in America.

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