11/08/2017
To those small business owners using S-Corporations,
This message is to reach out to you regarding the tax legislation that has been introduced in the House of Representatives:
https://www.congress.gov/bill/115th-congress/house-bill/1/text
While this is merely a bill that may be changed considerably as it works its way through Congress, it has some very important implications for S-corporation shareholders that actively work in their businesses. The tax strategy currently being utilized by many of you may be severely disrupted.
Currently, S-corporation shareholders only pay social security and Medicare taxes on their salaries as opposed to a percentage of their total business income. If enacted, this bill could significantly increase the amount of social security and Medicare taxes that most of you are currently paying by subjecting not only your salaries, but also your overall earnings from your S-corporations, to these taxes. As there is a cap on earnings subject to social security taxes, smaller 'ma and pa' businesses may see the largest overall effective tax rate increases.
Accordingly, for some of you, it may be preferable to use a tax classification other than an S-corporation should these rules be put into place. Other options generally include electing to be taxed as a sole proprietor, partnership, or C-corporation.
Please know that I am committed to researching any new tax legislation as it comes to pass and will be happy to help you develop a new tax strategy if your current one becomes obsolete. Making an election to change your classification for tax purposes is generally something that must be done by March 15, 2018, if the election is to be effective for the 2018 tax year. As this type of planning may be required in the middle of tax season, I encourage you to reach out to me if you would like to schedule a planning session following the actual passage of any tax legislation. I speculate that major changes will be put into place by the holiday season.
The above tax bill also contains many income tax implications and I have received numerous questions as to its overall impact. While it is difficult and premature to assess its potential impacts on a client-by-client basis, those who will be affected most by the bill are those with a large amount of income. As a general rule, if you are not in the highest tax bracket, then the bill can go either way in terms of whether or not it will help you (social security and Medicare tax implications aside, as the bill could cost you thousands in that regard), but it will hopefully produce a small savings for most with respect to income taxes. For those in the highest tax bracket, especially those with income well over the point where the highest rate kicks in, the bill will generally provide a considerable income tax savings and, given the cap on earnings subject to social security taxes, a considerable overall savings as well.
Sincerely,
Brendon Krause, CPA, M.S.
Text for H.R.1 - 115th Congress (2017-2018): Tax Cuts and Jobs Act
