At a recent seminar I was exposed to a concept that terrified me greatly. There is a tax reform proposal that the GOP is working on for the 2017 fiscal year. The revocation of all S-Corp elections!
Never mind that the S Corps continue to be the most prevalent type of corporation. According to the IRS’s most recent data, about 70% percent of all corporations filed as an S Corp. Some are regular corporations electing S Corp status and some are LLCs, checking the box for corporate taxation and then electing S Corp status.
So basically this is the vehicle of choice for most small business owners. Under the current law an S-Corp owner may benefit by having the profit from their company not be subject to FICA taxes. This allows the owner to have a slight reward for taking on the risk of starting a business. But it also allows the business owner to not pay FICA taxes on the moneys needed to repay debts and loans. Nor reduce the amount of money that can be spent on machinery and equipment for future growth,
The revocation would force all S- Corps to revert to C-Corps. Only allowing money to come our as dividends or wages. The C-Corp is also subject to corporate tax rates as well.
I consider this a pure money grab guised as tax reform. My biggest concern is that this proposal is being prepared by the party that is thought to be more business friendly. Apparently only big business friendly. I have not seen either party show signs of being a friend to small business. Which, by the way is the largest engine of creating jobs this country has.