S Corporation Association Chairman Richard Roderick weighed in on behalf of S corporations yesterday regarding the second stimulus package being developed in the House. In a letter to Small Business Committee Chairwoman Nydia VelC!zquez, Roderick argued that any bill moving through Congress should include assistance to S Corporations.
In particular, the letter advocates for relief from the built in gains tax (BIG) that forces so many S corporations to sit on appreciated assets that could be put to better use. As the letter states:
“According to government statistics, hundreds of thousands of S corporations nationwide may be sitting on “locked-up” capital that they cannot access or redeploy due to the prohibitive tax implications of BIG. This “lock-in effect” is widespread and results in these businesses unable to access billions of dollars in assets that could be used to grow the business and hire new employees.”
While the economic news this week has improved, there remains considerable appetite on the Hill for moving a second package of pro-growth provisions. Given the important role S corporations play in economic growth and job creation, it only makes sense that one of our priorities be included.
Tax Gap and Payroll Taxes and S Corporations
Our friends over at TIGTA (the Treasury Inspector General for Tax Administration) have sent another shot across the bow of the S corporation community regarding the payroll taxes we pay.
In a report released yesterday (Additional Actions are Needed to Effectively Address the Tax Gap), the Inspector writes:
“Similarly, there are potential abuses of employment tax laws caused by misclassified workers and single shareholder owners of Subchapter S corporations. In addition, a prior Treasury Inspector General for Tax Administration audit found that a significant number of single shareholder owners of Subchapter S corporations did not pay themselves salaries to avoid paying employment taxes. We estimated that this would cost the Department of the Treasury approximately $60 billion in employment taxes over 5 years. We believe that the combination of increased transparency through expanded information reporting and targeted legislation aimed at tax abuse loopholes would make the strategy for the Reduce Opportunities for Evasion component more robust.”
As a reminder, the issue is whether some S corporation shareholders who actively work at their business pay themselves a less than market salary in order to avoid paying payroll taxes. In recent years, this issue achieved notoriety during a featured exchange in the Vice Presidential debate in 2004 and later picked up as a possible $57 billion revenue raiser by the Joint Committee on Taxation in 2005.
To date we’ve seen four distinct S corporation targets for increased payroll tax levies:
- The original JCT report would have targeted ALL S corporations;
- The second JCT report focused on personal services businesses similar to those defined by Section 448(d)(2);
- The TIGTA has highlighted single shareholder S corporations; and
- The Rangel bill would affect S corporations engaged in services businesses on the portion of their income that derives from service activity.
S Corp expects that this issue, along with so many tax items affecting our members, will be debated in Congress in the next Congress as part of broader tax reform. However, with the resolution of tax provisions expiring at the end of this year unclear, it could come up sooner. We have weighed in with the tax writers before on this issue. With TIGTA keeping the issue front and center, we plan to do so again.