Unfavorable Tax Change Looming for S Corporations

June 24, 2010 | Subscribe to our RSS Feed

A recent legislative proposal may put an end to a favorable tax situation for personal services businesses taxed as S-corporations.

Personal services businesses like dental practices, accountants, lawyers and engineers being taxed as S-corporation entities beware; a huge tax hike looms on the horizon.  Included in the bill known as the American Jobs and Closing Tax Loopholes Act of 2010 (now that is getting right to the point) is a provision that would tax S-Corporation net income after all expenses as self employment income.  This proposal would affect these businesses with three or fewer shareholders where the shareholders are providing the services.

This would eliminate the situation where an owner takes an unreasonably low salary to avoid paying Social Security and Medicare taxes on wages and then takes “compensation” in the form of distribution payments.  It was just this type of strategy that helped taxwriters decide it was time to take action against these S-corporation shareholders from gaming the system.

While the law has yet to be passed it bears careful watching due to the large tax bite this will take out of those dentists, accountants, lawyers and other service businesses being taxed as S-corporations.  Ouch!

Dentists, for more information, visit Larry the Accountodondontist.

Questions?

larry.goldberg@glassjacobson.com