Real quick, here’s what we’re hearing on the prospects of tax legislation moving when Congress returns next week:

Congressmen Hastert, Boehner, and Thomas are gathering today to decide what the House tax bill should look like. As we’ve previously reported, the best guess is a narrow bill that extends for a couple years expiring tax provisions like the R&D tax credit, together with some non-controversial trade proposals. Targeted provisions outside the usual extenders may get included, but that’s not clear right now.

On the Senate side, the limiting factor appears to be whatever can get adopted by voice vote. With the Senate leadership eager to finish the Lame Duck session next week, they just don’t have time for an extended debate over a tax bill. If that’s correct, then it’s likely the proposed technical corrections and any revenue offsets (read tax increases) are extremely unlikely.


Among the many threats facing America’s S Corp community in the coming Congress, yesterday’s Wall Street Journal highlighted yet another — a possible deal on Social Security that would include a payroll tax increase.

As the Journal notes, “The Bush Administration has been around long enough that by now we can smell a retreat in the making. To wit, the White House is getting ready to throw personal retirement accounts over the side in an attempt to cut a Social Security deal with the new Democratic Congress. Will a tax increase be the next concession?”

There are a couple ways Congress could raise Social Security taxes, and both would adversely affect S corporations.

They could widen the Social Security tax base by increasing the types of income that pay Social Security taxes — like applying payroll taxes to all S Corp income regardless of whether its paid in wages or not.

Or they could eliminate the Social Security wage cap. This cap limits the application of the 12.4 percent Social Security tax to the first $97,500 (in 2007) in wages a worker earns.

Or they could do both, presenting S Corps with a double whammy of eliminating the wage cap while applying payroll taxes to all S Corp income. The result of this combined tax hit would be to raise federal marginal rates for S Corps making over $97,500 from 37.9 percent (income tax rates plus the 2.9 percent Medicare tax) to over 50 percent!

Such an increase would not only eliminate the tax relief of 2001 and 2003, it would fully offset all the tax relief dating back to the Tax Reform Act of 1986 - and pretty much eliminate the whole reason S Corps were created in the first place.

As you can imagine, your friends here at S Corp are extremely worried about any potential deal on Social Security that includes tax increases, and we’ll keep on the lookout to make sure you’re fully apprised of any developments.


Finally, INC Online reports that the IRS increased audits of S Corporations by 34 percent this year, while audits of corporations with more than $10 million in assets declined. With the increased emphasis on the Tax Gap, particularly in the Senate, we’re expecting more of the same for 2007. As INC reports:

“We have placed more emphasis in the growing area of these flow-through returns involving S corporations and partnerships,” IRS Commissioner Mark Everson said in a statement, noting that S corporation audits are at their highest level since 2000, and audits of partnerships are now at their highest level since 1998.

In a related development, concerned business associations are gathering next week to convene a new coalition to ensure fairness in the on-going Tax Gap discussion. With Congress, especially the Senate, displaying an increased focus on the Tax Gap and possible proposals to close it, the business community needs to ensure that its concerns are heard as the legislative process moves along. S Corp promises to be an active part of this new group.