Tuesday, April 6, 2010

Are S Corporations About To Get Slammed?

The national debt is currently estimated at $12,792,967,119,405.50. Divided by the current number of people in the United States, estimated at 309,021,537, this comes out to about $41,398.30 per person.

Think they'll take a check?

While the above figures are good for a grim chuckle and a resigned "what can you do," an additional reality isn't nearly as amusing. Unless Congress acts to extend tax cuts instituted by the Bush administration in 2001 and 2003, these cuts will expire at the end of the year. Should this happen, small businesses, especially those organized as S corporations, will see an immediate increase in their tax burden.

Specifically, the aforementioned tax cuts reduced the individual income tax rate. The structure of an S corporation is that although the corporation is not subject to federal income tax, all profits are passed through to the shareholders in the company. These profits are considered income upon which federal income tax is levied. In short, prepare to get clobbered come 2010.

The owner(s) of an S corporation pays taxes on their proportional share of the corporation's profit. Given that most independent agents own their agencies, this heavily impacts our agent force. In addition to federal taxes, S corporations in California pay a 1.5% franchise tax on their net income.

While nothing is inevitable except death and taxes, being taxed to death isn't a pleasant way to go. For all the hot air floating above Washington about not raising taxes on the middle class (*yeahrightsnort*), should taxes go up by default it's going to hit a lot of people hard. Given Washington's insatiable appetite for spending, believing this will go any other way is most likely wishing on unicorns. Keep a close eye on this issue. It's not going to go away on its own.

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