Like us, many CPAs and financial services providers have seen a great tax benefit to incorporating small businesses and individuals that paid substantial taxes as sole proprietors. Another benefit to incorporation is that corporations are audited far less than sole proprietors. It has been a real win/win for the client.

However, those of you that have S-Corporations may see tax increases for 2011 and beyond if The American Jobs and Closing Tax Loopholes Act of 2010 passes. This tax bill is currently awaiting passage in the Senate (recently tied up by a filibuster). It contains numerous provisions that increase tax revenues for the government, as well as other provisions to help small businesses and taxpayers.

While there could be help for small businesses, specifically of concern to those with S-Corps is section 413 of the bill. It addresses employment tax treatment of professional services businesses, and S-Corporations are the target. Under the current law, employment tax can be significantly lower in an S-Corporation compared to the taxation of a self-employed sole proprietor. Under the proposed bill awaiting Senate approval, an incorporated business is considered a “professional service business” according to the following two tests:

1. The corporation is in engaged in a “professional service business,” which the tax code defines as a trade or business, when substantially all the activities of which involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.

2. The principal assets of the business are the “reputation or skill” of three or fewer employees.

We are following developments on this bill and will keep Blue Leaf clients informed. Please feel welcome to contact us at anytime with questions or concerns. When the bill passes, we strongly encourage our incorporated clients to call our office to discuss how this might impact your tax position for 2011.

Here are some links that provide information and differing views on the overall bill:
The National Law Review
Article on Nancy Pelosi’s website
The United States Senate Committee on Finance press release
The Wall Street Journal online