I am receiving reports that in 2011 Uncle Sam will be taxing S-Corporation profits for employment taxes. This has been on Congress’s radar for a while now, so it is not a complete shock. But it doesn’t make me any happier.
But this will hurt a number of employers in the personal service arena (i.e. accountants, attorneys, insurance, financial services, performing arts). These are typically the businesses that are the engine that creates the jobs for the country. This will crimp that growth engine. Especially since it appears that there will be no exception for working capital.
Never mind that the IRS had Revenue Ruling 74-44 stating that the IRS will re-characterize small business corporation dividends paid to shareholders as salary when such dividends are paid to the shareholders in lieu of reasonable compensation for services.
Uncle seems willing to sacrifice the future job growth of the country for the immediate cash reward. I believe this to be a short sighted approach to our problems.
I have had S-Corps owners that had to miss paychecks due to cash flow shortages during the year only to have the company show a profit at the end of the year.
Some of this can be due to the repayment of loans/debts, a balance sheet item, that is reduced but does not impact income, but does eliminate cash for cash flow purposes (paying more taxes or payroll).