“S” Corporations Soon to Lose Their Edge

            The glory days of “S” corporations may soon become a thing of the past.  Not good news for many small businesses, at a time when tax news is almost always bad news.

            Recall that “S” corporations are those which typically don’t pay tax at their own level–the bottom line “passes through,” as the jargon goes, to the individual income tax return of the owner/shareholder.  And until now, at least, any bottom line left over after the payment of salary to the shareholder has come with an income tax burden, for sure, but no payroll tax cost – no FICA or Medicare, that is.  And to be sure, this perceived “freebie” has been subject to some manipulation by shareholders, over the years, who may have tended to minimize, just a little, that salary paid to themselves, thus allowing the remaining profit to come to them without the 15% + FICA/Medicare hit.

            But Congress may have finally had enough of this–as it is looking more and more like “S” corporation in personal service businesses will get clipped on every dollar (salary or otherwise) of profit.

            And while we’re on the subject, after Barack gets through raising the tax rates (starting at least next New Year’s Day) “S” corporations may suffer even further tarnishing of their lustre–particularly for folks in the highest tax bracket, presently 35%, soon to move back to a Clintonian 39.6%.  Unless the tax rates of “regular” corporations also increase from the present 35%, it may actually begin to make more sense in some cases to leave some business profit in your corporation, clipping it at the lower 35% rate.

            All of which presumes, of course, that there’s any profit to be had at all.  USA Today reported, recently, that paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year.  All the while that government-provided benefits from Social Security, unemployment insurance, food stamps and other government programs rose to a record high during the same period.

            Well that’s OK, right–as our beloved President recently noted, there will be a time for profits, but maybe that time isn’t right now.

            USA Today goes on to note that we are witnessing a longer term trend accelerated by the recession and the federal stimulus giveaways intended to counteract the downturn.  The result is a major shift in the source of personal income from private wages to government programs.

            Nice.

            Consider the thoughts of David Henderson, an economist at the Hoover Institution, who notes that a shift from private wages to government benefits saps the economy of dynamism.  “People are paid for being rather than for producing.”

            All of which leads to the government’s ever-increasing demand for more and more of our dough to cover all of its obligations–which may be at least one reason why the Federal Trade Commission has recently come up with the notion that journalism ought to be “reinvented,” to include some sort of new tax on news and information websites, possibly a 5% tax on consumer electronic devices, advertising and cell phones. 

We can hardly wait for the June 15 “round table” discussion which the FTC plans to hold on these subjects.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

            Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He is also a contributor to the recently published 13th edition of Tax Savvy for Small Business, published by Nolo.  He can be reached at 831-7288, and welcomes comments at his blog www.ashleyquinncpas.com/blog.

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