Those professional small business owners that have organized their businesses as S-Corporations may want to take a look at the American Jobs and Closing Tax Loopholes Act of 2010. Contained within that bill is a little provision that will have a big consequence for professional corporations that are organized as S-Corps. Professional corporations consist of doctors, lawyers, architects, engineers and the like and if the new law is passed, the profits for these small business professional corporations will be taxed (currently proposed to be 15%).
Why Professional S-Corps should care?
Currently S-Corps owner/shareholders can minimize their tax liability by taking part of their earnings from “reasonable compensation” and the rest from distributions from profits. Reasonable compensation is taxed thru payroll and distributions are not subject to payroll taxes. With the passage of this bill, distributions will now be taxed. There are tests that must be tried to see if your S-Corp will be deemed a disqualified S-Corp so be sure to speak with your tax advisor to see if your S-Corp is considered disqualified.
What’s a Professional S-Corp to do?
Now is the time to contact your senator and tell them your thoughts about the proposed changes for professional S-Corps. If the bill is finally passed, there may be a chance that some professional S-Corps will close down in the coming years.
The Tech Accountant
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