Congress Attempts To Sneak Tax Increase Into Student Loan Bill (Forbes)

-   Whew, S corporation shareholders… You dodged a bullet last week when the bill to raise your taxes was voted down.

- Article originally published on Forbes.com by Kelly Phillips Erb - 05/16//2012 -

You mean you didn’t know there was such a bill? Of course you didn’t. That’s because Congress did what it does best: it snuck a controversial provision to boost taxes on certain S corporation shareholders into the Stop the Student Loan Interest Rate Hike Act of 2012 (S.B. 2343).

Despite the fact that the text of the bill noted “This Act may be cited as the ‘Stop the Student Loan Interest Rate Hike Act of 2012′ and that the purpose of the bill is stated as “A BILL [t]o amend the Higher Education Act of 1965 to extend the reduced interest rate for Federal Direct Stafford Loans, and for other purposes,” the student loan portion of the bill is exactly three lines.

The rest of the bill focuses on S corporations. And by rest, I mean 1,361 words in the 1,571 word bill (or roughly 87%) addressed the taxation of S corporations.

The thrust of the bill – and stop me if you’ve heard this before – is to tax small service-based businesses by imposing a payroll tax on certain shareholders. Specifically, the tax is targeted at certain shareholders in the fields of “health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.” So, professional services.

And only small businesses. Really small businesses. The tax is targeted at those businesses “if 75 percent or more of the gross income of such business is attributable to service of 3 or fewer shareholders of such corporation.” It hits shareholders whose modified adjusted gross income (MAGI) is $250,000 or more for married taxpayers and $200,000 or more for individual taxpayers (keep in mind that S corporations are pass through so that the paper “profit” of the business is passed through to the taxpayers whether or not they actually receive the money).

To be clear, the limit would mean that bigger businesses – those with lots and lots of professionals who are shareholders – would be exempt from the increase. So if KPMG were an S corp? Exempt. Your local CPA? Not exempt. JPMorgan? Exempt. Your neighborhood broker? Not exempt.

Yes, it’s the same “let’s kill small businesses” language that was snuck into the American Jobs and Closing Tax Loopholes Act of 2010. It was eventually pulled from that bill but we figured we’d see it again. And we did. Surreptitiously snuck into a feel good bill – because voting against caps for student loan interest is bad for votes, right?

Thankfully, some in Congress were able to sort through the muck. The roll call for the vote (you can see it here) was mostly along party lines with a 52-45 vote (the two abstentions were Sen. Mark Kirk (R-IL) and Sen. Richard Lugar (R-IN)) with no Republican voting in favor and just one Democrat voting no (Sen. Harry Reid (D-NV)); the latter is even more perplexing since Reid apparently introduced the S corporation provision into the bill. The two Independents in the Senate, Sen. Joseph Lieberman (I-CT) and Sen. Bernard Sanders (I-VT), sided with the Democrats in voting yes.

Senate Minority Leader Mitch McConnell (R-KY) defended the vote, noting that the Republican party was not in favor of a student loan interest rate increase but did not support a boost in taxes for small businesses. That bit didn’t get much play before – even from folks like me (with apologies to Sen. McConnell).

Expect to see this S corporation vote again, likely hidden in some other vote-getting measure. Like the “We Don’t Like People Who Kick Puppies” bill. It sounds so much better than the real title, the “Death to Small S Corporations and Your Neighborhood Businesses” bill.

Article originally published on Forbes.com by Kelly Phillips Erb - 05/16//2012