Attack on S Corps/LLC---and small business!

Big news is the attack on S corps and LLC’s in the annual extensions bill, which is the legislation that extends certain expiring tax provisions. The attack is to treat the profits of small ‘professional’ service firms the same as sole proprietors, throwing out decades of case law defining reasonable salaries and completely ignoring the corporate structure. It pits small firms against larger ones who are not subject to the rule. ‘Professional’ services is defined to include most service businesses. The SS ceiling is around 106k this year, and the Medicare tax runs beyond that. A firm earning around that 106k, who has used a reasonable salary of 60k, for example, will see increased taxes of $7000. It would take effect next year. The same rule applies to LLC’s, and includes spousal ownership. It seems to have enough support for passage...stay tuned. This will change everything in entity choices. and is a blatant attack on small businesses for revenue raising in the SS system.

Small businesses, by and large, start as sole proprietors, and all profits are subject to both income and SS taxes. As businesses grow, generally they migrate to either an S corp or an LLC depending on the particular situation, where they have been permitted to set a reasonable salary for services performed, just as larger corporations do. This has been upheld in the Courts, who have defined the issues used to arrive at a reasonable salary. Sadly, due to much abuse by S corp owners and their accountants over the years, rather than auditing those corps who do NOT report reasonable salaries, Congress had decided instead to issue the death sentence to all small business owners using these entities. By requiring ALL profits of these firms to be subjected to SE or SS taxes will double those taxes, which are generally already far more than the income taxes reported. And it completely removes any reasonable options for the small business owner in choosing an entity. For all practical purposes, they'll remain taxed as a sole proprietor, or taxed as a large corporation with oppressive burdens of reporting and taxation not intended for the small business.