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Focus on Professional Services: Proposed Legislative Changes Could Affect S Corporations

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Congress is considering legislation that could have a major effect on S Corporations, specifically those involved in professional services.
June 22, 2010

Congress is considering legislation that could have a major effect on S Corporations, specifically those involved in professional services.

The bill, known as the extenders bill is officially titled in the House as Closing Tax Loopholes and Preventing Outsourcing Act of 2010. It has already passed in the House and is being considered in an amended form in the Senate.

If passed by both houses and signed by the President in its current form, this bill would retroactively reinstate and extend for one year a host of important tax breaks for businesses and individuals, as well as introduce a host of controversial revenue raisers.

The bill would prohibit using certain S corporations as a way to minimize Medicare and Social Security taxes.

Specifically, the bill states that for tax years beginning after Dec. 31, 2010, individuals engaged in professional service businesses would no longer be able to avoid employment taxes by routing their earnings from a limited liability corporation taxed as a partnership or a partnership through an S Corporation.

The House bill restrictions would apply where:

  1. An S corporation is engaged in a professional service business that is principally based on the reputation and skill of 3 or fewer individuals or
  2. An S corporation is a partner in a partnership engaged in a professional service business if substantially all of the activities of the S corporation are performed in connection with the partnership.

The modified Senate substitute amendment changes the first application of the House bill above so that it would apply only if 80 percent or more of the professional service income of the corporation is attributable to the services of three or fewer owners of the corporation.

The second application of the restrictions would be unchanged by the modified Senate substitute amendment.

RubinBrown is closely watching this legislation. As it moves its way through Congress, we will keep you informed of its progress as well its effect on your businesses.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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