Senate Votes Down S Corporation Changes

Senate Votes Down S Corporation Changes

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A few days ago the Senate failed to pass Senate bill S. 2343, the “Stop the Student Loan Interest Rate Hike Act of 2012 which would have limited the ability of S corporation shareholders to classify payments made to them by their corporations as distributions thereby avoiding self employment tax.

Tony Nitti has the story:

The bill would have paid for the lost revenue caused by keeping the interest rate on subsidized Stafford loans steady at 3.4% for another year by closing a long-standing S corporation “loophole” (their words, not mine).

The loophole in reference is the ability of S corporation shareholder/employees under current law to forego compensation in favor of distributions to reduce their payroll tax obligation. The Senate bill would have taken a hybrid approach to closing the loophole by subjecting the income allocated to shareholders of “professional service” S corporations — law, lobbying, accounting etc… — to self-employment tax only if:

1. the shareholder provides substantial services to the S corporation;

2. 75% or more of the gross income of the business is attributable to 3 or fewer shareholders; and

3. the shareholder has AGI > $250,000 if MFJ and $200,000 if single.

With the Senate bill dead — and with no other bill currently in the pipeline to close the loophole — S corporation shareholder-employees can continue to play the compensation/distribution game, but be warned…the IRS is watching.

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About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida