Vince Nardone: Tax and Controversy

Will S-Corporation Distributions Become Subject to FICA Taxes Under the New Obama Administration?

Guest Author: M. Pilar Honer, Esq., Columbus, Ohio

 

During the past few years, there has been much speculation among tax practitioners as to whether Congress plans to have S-corporation distributions become subject to FICA taxes. This would eliminate what some tax professionals see as the perceived benefit of S-corporations over other types of taxable entities. As background, this issue was introduced back in October of 2007 during the 110th Congress by Charles Rangel, chairman of the ways and means committee (the committee in charge of tax legislation), in bill 3970.  This bill, however, never became actual law.  See the attached documents discussing the bill.

 

Because of recent discussions in the media and other places regarding Congress and specifically Obama’s desire to tax the distributions and subject them to FICA tax, our firm wanted to obtain an update and understanding as to whether or not this is going to occur.  Recently, our firm sat in on an update from Senator Hatch’s office in Washington DC regarding S-corporation legislation. Senator Hatch has been intimately involved in S-corporation issues over the last decade. During that update, there was no specific discussion regarding the S-corporation distribution issue.  But, they did indicate that we should anticipate some significant legislation dealing with S-corporations in 2009.

 

Our firm also contacted the Joint Committee of Taxation to gain some additional insights.  The Committee advised us that while there is no bill currently being reviewed that includes the S-corporation distribution issue, it is definitely on their radar.  Unfortunately, they could not give us a definitive answer as to whether or not it will be introduced again.  But, they did point out that after bill 3970 was introduced back in 2007, Congress became and is still aware of this issue.   They also advised us that although this issue has not been reintroduced since the 111th Congress session started in back in January 2009, it does not mean anything. It could be reintroduced at anytime.  I would also like to point that Charles Rangel, the person who initially introduced bill 3970 back in 2007, continues to be the chairman of the ways and means committee.  Further, we currently have a Democratic controlled Congress; therefore, I believe it is safe to predict that this issue will likely be introduced again.

 

The question then is how do we plan for the future?  Do we eliminate the desire to form S-corporations for now?  Or, do we hold off on any tax planning until we have a better understanding of what is going to happen?  I will leave those questions for another discussion.  I would, however, be interested if anyone has heard anything different or in addition to the above.  Thanks.

 

See the attached documents regarding the prior legislation.

Download S corporation legislative materials – distributions and taxes

 

Will S-Corporation Distributions Become Subject to FICA Taxes Under the New Obama Administration?

Guest Author: M. Pilar Honer, Esq., Columbus, Ohio

 

During the past few years, there has been much speculation among tax practitioners as to whether Congress plans to have S-corporation distributions become subject to FICA taxes. This would eliminate what some tax professionals see as the perceived benefit of S-corporations over other types of taxable entities. As background, this issue was introduced back in October of 2007 during the 110th Congress by Charles Rangel, chairman of the ways and means committee (the committee in charge of tax legislation), in bill 3970.  This bill, however, never became actual law.  See the attached documents discussing the bill.

 

Because of recent discussions in the media and other places regarding Congress and specifically Obama’s desire to tax the distributions and subject them to FICA tax, our firm wanted to obtain an update and understanding as to whether or not this is going to occur.  Recently, our firm sat in on an update from Senator Hatch’s office in Washington DC regarding S-corporation legislation. Senator Hatch has been intimately involved in S-corporation issues over the last decade. During that update, there was no specific discussion regarding the S-corporation distribution issue.  But, they did indicate that we should anticipate some significant legislation dealing with S-corporations in 2009.

 

Our firm also contacted the Joint Committee of Taxation to gain some additional insights.  The Committee advised us that while there is no bill currently being reviewed that includes the S-corporation distribution issue, it is definitely on their radar.  Unfortunately, they could not give us a definitive answer as to whether or not it will be introduced again.  But, they did point out that after bill 3970 was introduced back in 2007, Congress became and is still aware of this issue.   They also advised us that although this issue has not been reintroduced since the 111th Congress session started in back in January 2009, it does not mean anything. It could be reintroduced at anytime.  I would also like to point that Charles Rangel, the person who initially introduced bill 3970 back in 2007, continues to be the chairman of the ways and means committee.  Further, we currently have a Democratic controlled Congress; therefore, I believe it is safe to predict that this issue will likely be introduced again.

 

The question then is how do we plan for the future?  Do we eliminate the desire to form S-corporations for now?  Or, do we hold off on any tax planning until we have a better understanding of what is going to happen?  I will leave those questions for another discussion.  I would, however, be interested if anyone has heard anything different or in addition to the above.  Thanks.

 

See the attached documents regarding the prior legislation.

Download S corporation legislative materials – distributions and taxes