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Big Tax Hike for S corporations

One of the main advantage for forming an S corporation is about to go away.

Right now, S corporation shareholders only pay employment taxes on the wages paid. But thanks to Section 413 of HR 4213-American Jobs and Closing Tax Loopholes Act of 2010, that's about to be a thing of the past.

This provision is tucked in on page 283 of a 400+ page document. All the newscasts are focusing on the "tax extenders" which are generally pretty nice.But if you're a consultant operating as an S corporation this will have a huge impact on your tax bill.

If this bill is signed, which seems likely, effective the 2011 tax year, shareholders will have to pay the self-employment tax on his/her pro rata share of the taxable income of S corporations that engage in professional services.

Professional services is specifically defined as

any trade or business if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services

This bill closes the "loophole" that makes S corporations so attractive for professionals & consultants.

Stay tuned for updates...

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UPDATE: Thank you Sentors Snowe & Collins

According to a story on Politico.com, Senators Olympia Snowe & Susan Collins (both R-Maine) are holding out over the proposed changes to taxes on S corporations.

"And in a floor speech, Snowe said proposed reforms aimed at correcting abuses by S corporations were “ill-conceived” and a “terrifying template” for small-business owners...."

As a result the bill has been pulled. With less than 30 working days until the August recess it looks like we have a reprieve until Labor Day.

I think Miss Manners would say a quick thank you note is in order!
L:)

End result?

Did the proposed changes to taxes on S corporations make it into the final bill that was passed last week? I can't seem to find the answer. As someone who just formed a corporation and was planning to make an S-corp election, I am quite curious as the whether the Senators from Maine succeeded in making any changes.

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