April 25, 2012
Owners of an S corporation can receive business profits in the form of wages, which are subject to Social Security and Medicare tax, or dividend distributions, which are not. Naturally they prefer the latter because of the lower tax cost. The IRS can challenge the tax treatment if wage payments are unreasonably low, particularly where business profits are highly dependent on the services or reputation of the owner. Enforcement is difficult, however, and the use of S corporations to avoid paying employment taxes appears to be widespread. Financial disclosures of presidential candidates Newt Gingrich and John Edwards indicate that both of them used this technique.
The idea of closing this loophole has been floating around for some time. For example, California Democrat Pete Stark introduced a bill called the Narrowing Exceptions for Withholding Tax Act (or NEWT Act). The idea hasn’t had much momentum, but may have taken on new life as Democrats have attached a different version of this proposal (without the snarky title) to legislation that would prevent the impending increase in student loan rates. Blocking the increase in student loan rates appears to be a popular idea that has bipartisan support, but it remains to be seen whether the cost will be funded by this particular loophole-closer.
July 20, 2011
Senators Levin (D. Mich) and Brown (D. Ohio) have introduced the Ending Excessive Corporate Deductions for Stock Options Act, legislation that would limit the amount a corporation can deduct in connection with the exercise of compensatory stock options to the amount shown as an expense for the options in its financial statements. Similar proposals have been made in the past without garnering wide support.
Comment: Although it seems superficially logical that the tax deduction should not exceed the accounting expense, these figures differ because their purposes differ. The accounting expense relates to the company’s cost of providing this benefit, which in turn is based on the value of the option when granted. The tax deduction relates to the value of the benefit received by (and taxed to) the option holder, which is based on the bargain element of the option when exercised. A mismatch between these numbers is a normal consequence of ups and downs in stock prices and does not indicate the company has understated its accounting expense or claimed an excessive deduction.
April 15, 2011
A rule that would have imposed burdensome new reporting requirements on businesses has been repealed. The rule was designed to clamp down on tax cheats by requiring businesses to file Form 1099 whenever they pay more than $600 to a single vendor for goods and services. It quickly became apparent that this would be a recordkeeping nightmare and both political parties favored repeal. Wrangling over a revenue offset prevented prompt action, but Congress finally agreed on a version that under some circumstances will recapture part of a healthcare tax credit provided by the Affordable Care Act. President Obama signed the repeal legislation despite misgivings about the revenue offset.
February 4, 2011
It turns out there’s one feature of the healthcare reform law just about everyone agrees on. A provision requiring increased reporting of payments by businesses using Form 1099 was designed to increase government revenues by some $44 billion without increasing taxes. Yet the paperwork burden brought complaints from all quarters, reaching such a level that President Obama mentioned the need to repeal this provision in his State of the Union address. Repeal had been stymied by disagreement over how to prevent a $44 billion increase in the projected budget deficit. The Senate has now voted overwhelmingly in favor of repeal with a provision that calls for unspecified cuts in spending.
December 17, 2010
The tax deal brokered by President Obama and Senate Republicans passed its last hurdle when it secured approval from the House of Representatives late Thursday. It was enacted into law when President Obama signed it Friday. For an overview of major tax provisions, see our Q&A on the Tax Deal.
November 17, 2010
The current Congress has little time and much to accomplish. It has five big items on its tax agenda. Here’s a quick summary of what they are and where they stand. (more…)
September 30, 2010
Just before closing up shop and heading out on the campaign trail, Congress passed legislation requiring federal agencies, including the IRS, to use “plain writing” in documents issued to the public, including those issued electronically (in other words, materials posted on agency websites). Alarm bells went off here at Fairmark.com, as this development threatens to put us out of business. We were relieved at what we learned in digging a bit deeper. (more…)
September 24, 2010
The House of Representives has passed the Small Business Jobs Act of 2010, offering various tax breaks aimed at small businesses, and unrelated provisions expanding access to Roth accounts in employer plans. Some of the provisions take on the date of enactment, which will be Monday, September 27, the day President Obama signs it into law. In a separate article we’ve posted questions and answers about Roth conversions within employer plans.
September 24, 2010
As of September 27, 2010, employees with 401k or 403b accounts can do a Roth conversion without taking money out of the plan — but only if the employer takes steps necessary to permit these conversions. Here are questions and answers about these provisions. (more…)
August 11, 2010
Beginning 2011 the advance payment option for the earned income credit will no longer be available. This option allowed individuals who were eligible for the credit to receive it as part of their paychecks instead of waiting to file their tax return and receive it as a refund. Few taxpayers took advantage of the option, and Congress decided to eliminate it as part of the legislation providing assistance to cash-strapped state and local governments.
The legislation contains other tax provisions, but these are mainly of interest to multinational corporations that will see new restrictions on their ability to claim the foreign tax credit.
|That Thing Rich People Do||The fastest, easiest way to learn the principles of investing.|
|Our complete guide to Roth IRAs and Roth accounts in employer plans: choosing, creating, building and using these accounts.|
|Consider Your Options|
|A plain-language guide for people who receive stock options or other forms of equity compensation.|
|Equity Compensation Strategies|
|A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.|
|Capital Gains, Minimal Taxes|
|Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.|