A new proposed tax

What starts off as a good idea…

“Stop the Student Loan Interest Rate Hike Act of 2012″ is to stop the scheduled jump in Stafford loan interest rates from 3.4 to 6.8 percent that is set to take effect in July. With high college graduate unemployment rates, this seems to make sense. (We will not be getting into a discussion of whether an undergraduate degree in certain majors is worth the debt taken out to obtain the degree. As that thought presumably took place when selecting the college, major, etc. Or why college costs have increased so much).

The bill aims to keep the interest rate on college students’ loans from doubling on July 1, 2012, and would pay for the cost of keeping the current 3.4% loan rate in place by closing what’s seen as an S Corporation employment tax “loophole.” According to a summary of the legislation, the loophole would be closed by requiring those with incomes over $250,000 to include, for purposes of employment taxes, income received from a S Corporation or limited partnership interest in a professional services business.

The change would target only those S Corporations that derive 75% or more of their gross revenues from the services of three or fewer shareholders or where the S Corporation is a partner in a professional service business such as doctors, attorneys, etc.

Under current law, businesses organized as S-corporations don’t pay corporate taxes, and income earned is passed through to shareholders, who report that income on their personal tax returns. But if these shareholders are also employees, they can choose to treat some of their income as business profit — not salary, which lets them escape payroll taxes. But don’t worry – all the income is taxed.

The bill would eliminate that flexibility by requiring those with incomes over $250,000 to include, for purposes of employment taxes, income received from an S-corp or limited partnership interest in a professional service business. This change, however, would only apply to S-corps and partnerships in which more than 75 percent of its gross revenues come from the service of three or fewer shareholders, and only those in fields where most of the earnings come from the performance of services.

It definitely seems that clients this year where very aware of the tax bill and how to not pay more than they should. We will keep an eye on this to see how it develops. This is a very significant change to the long-standing tax rules regarding s-corporations.

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