Why do our clients establish S corporations? Is it the flow through taxation or limited liability? Is it the decent (but not great) fringe benefit write-offs or the ability to avoid all surtaxes for active owners? Is it the savings on Social Security tax on distributions or the single level of income tax? Its usually all of the above.
All of this may change if the House version of the 2017 Tax Bill is passed. Interestingly no one is talking about the potential end of “S” corporations. Why may they end after this year?
A hard to decipher provision on pages 49-52 of the House bill requires active owners of “S” corporations to allocate 70% of their flow-through income to ordinary tax rates, and subjects that amount to self-employment tax. You think that isn’t enough to end “S” corporations? Try this on for size: “S” corporations that are personal service type businesses in the fields of healthcare, engineering, architecture, law, accounting, consulting, performing arts or actuaries will pay SE tax on 100% of flow-through income!
If you are thinking that an LLC may be the best tax choice now, think again! The House bill also removes the limited partner exemption from self-employment tax!
We are watching these developments closely and will keep our readers informed. If the law is passed with this provision we will provide additional information to our clients to ensure they have the best entity choice.