Illinois Governor Proposes Gross Receipts Tax!

S Corp Member Alert! Governor Blagojevich proposed last month to replace the Illinois state corporate income tax with a gross receipts tax (GRT). Under the current proposal, the state’s current 4.8% corporate income tax rate would be phased out over four years and the new GRT would be imposed on all revenues realized by IL businesses from the sale of good and services – .85% for goods and 1.95% for services. The change will increase projected annual revenue collections more than four-fold and has been characterized by the non-partisan Tax Foundation as the largest state tax increase this decade.

A massive tax increase is bad enough. But a gross receipts tax? These taxes are considered to be the most economically damaging of all taxes. As the Tax Foundation observed:

    The new tax would be problematic not only because of the additional tax burden it would impose, but also because of the way in which it would do so. Gross receipts taxes are one of the most economically damaging ways for states to extract revenue, and economists from all ends of the political spectrum are nearly unanimous in their opposition to them.

As bad as gross receipts tests are, the reasoning behind the increase is worse. Apparently, the Governor is concerned that corporate taxpayers in Illinois have seen their share of total tax burden decline over the past three decades, from about one dollar in five to one dollar in seven. Why? Because of the dramatic growth of pass-through businesses like S corporations. According to the Governor’s office, the reported number of limited partnerships, limited liability companies and S corporations grew from 94,000 in 1984 to 285,000 in 2004.

The Governor looked at the data and decided that Illinois businesses weren’t shouldering their fair share.

But S corporations (and partnerships) pay plenty of tax. They just pay through the individual income tax rather than the corporate tax. This reality has the effect of reducing measured corporate income taxes and increasing tax collections on individuals and families, making it look like businesses are paying less tax than they are.

Moreover, if the GRT is enacted, Illinois S corporation owners will still be expected to pay the 3 percent tax on their business income imposed by the state’s individual income tax. This double tax effectively puts S corporations at a disadvantage relative to traditional C corporations in Illinois, and is patently unfair.

We will keep you updated as we learn more. If you have a business in Illinois, let us know. We’ll help you fight this unwise and unfair tax increase on Illinois businesses.

IRS Considering More S Corp Guidance

The 2004 American Jobs Creation Act contained numerous S Corp friendly provisions, including increasing the number of allowable S Corp shareholders from 75 to 100 and expanding the definition of a single shareholder to include large families.

According to BNA, the IRS is actively considering issuing additional guidance for some of the provisions (Sections 231 through 240 of the bill), including additional guidance on Section 231 of the Act, which defines which members of a family may be treated as a single S corporation shareholder. This additional guidance was part of the IRS’s business plan for 2005/2006 business year, which ends June 30th. Look for the new guidance sometime around then.

For the JCT Summary of the American Jobs Act:

House Committee on Ways and Means Begins Corporate Tax Reform Hearings

S-CORP continues to monitor the possible impact - harmful or otherwise — corporate tax reform proposals could have on the taxation of S corporations. As S-CORP members will recall, the President’s tax reform panel recommendations issued last fall proposed to apply a new entity-level tax on S corporations and partnerships. Under the panel’s Simplified Income Tax Plan, all businesses with more than $10.5 million in receipts would be subject to a 31.5 percent entity-level tax, thus ending the unique pass-through structure that Congress intended when S corps were created over 50 years ago.

The Department of Treasury has been reviewing the panel’s proposals and is expected to pass on its own version to President Bush sometime in the future - likely after November. In the meantime, Congress continues to consider tax reform. On May 9th, the Ways and Means Subcommittee on Select Revenue Measures will hold a hearing to -examine the current U.S. corporate tax system and the base upon which taxes are imposed.

S-CORP will be engaged throughout the debate on tax reform and continue our efforts to preserve and protect your S corp business.

S-CORP Supports “Small Business Flexibility Act”

This week, S-CORP sent a letter to Senators Olympia Snowe (R-ME), Blanche Lincoln (D-AR) and Representatives Clay Shaw (R-FL) and John Tanner (D-TN) in support of their bill, the Small Business Flexibility Act. This legislation (H.R. 4006, S. 2462) would allow start-up S corporations to elect taxable years other than the calendar year. The calendar year is a huge challenge for CPAs and the bill will help give new S corporations increased access to their CPAs and greater flexibility to choose a financial year-end that corresponds with their business cycle.

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