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S-Corps 'r Us
Today's show about Measure 66, which would raise income taxes on the highest earning Oregonians, kept coming back to a spirited discussion about a not insignificant corner of IRS lingo: S corporations. Jon Chandler of the Oregon Home Builder's Association brought them up at the very beginning of the hour:
A lot of the people in that category [individuals over $125,000 a year, or households earning more than $250,000] aren't people but they're small businesses, in the sense that they're sub-S corporations — which is a tax designation of the Internal Revenue code — or limited liability companies, where their business income passes through to their personal taxes. So by raising taxes on those individuals, you're actually raising a tax on that business. It comes out of something.... You're taxing the business entity itself even though it's couched as a personal income tax measure.
Steve Novick countered that
93% of small business orders don't make enough money to be affected. Most of those that are affected, they don't make their money from their small business.... For the few small business owners that are affected, if they wanted to reduce — make sure that they're not affected by this tax, they could hire some more people, because they're not taxed on the overall income of the business, they're taxed on their share of the profits. They get to deduct, among other things, the wages they pay employees.
Novick also pointed out that we're not just talking about mom and pop small businesses: big-deal law firms like Stoel Rives (an LLP) would be included in this, as well, and their partners who wind up with a taxable household income over $250,000 a year would wind up paying "a little more."
Commenters picked up on all of this S-corp talk, and followed suit.
I'm not happy about paying more taxes, who is? We are likely to be affected in that my husband works from home in a business that is organized as a "S" corporation. Believe me, we are just getting by. No vacations or dinners out or savings. We can just pay our bills so any additional taxes on "S" Corporation distributions will affect us directly. However, I do view education as worthy of support. Each of us had the opportunity to receive an education, and we need to pay this back by giving new generations the same (or hopefully) better opportunities we have enjoyed.
(Klb, I'm obviously not an accountant, but it's worth pointing out that if you're just getting by, additional taxes on S-corporation distributions might not affect you directly. As a reminder, under Measure 66 you'd only be paying higher taxes if your household income were over $250,000.)
ORSunshine wrote that Jon Chandler is "skewing" the facts about how S-corps work, adding:
I am involved in a family business that is an S-Corp in Oregon. We offer consultant and freelance services. We bill for our services and pay our wages and the associated social security and business side of our income taxes out of the billed money received. We also pay for our business expenses (equipment, gas, etc.) out of the corporation's income. At the end of the year, any additional profit (which we aim to have very little of) is paid to us as a one time "bonus," which we are then liable for personal income taxes on. To say that taxing people's personal incomes above $125,000 would hurt business is a ridiculous anti-tax scare tactic, not reality.
And from Elena:
I lost my job at the beginning of last year and pulled myself up by my bootstraps. I didn't take a nickel from unemployment.
I now run a small business--S-corp. with 3 sub-contractors--that is successful enough to be taxed by this measure. Guess what? The extra $200- 500 I'd be paying with this tax would have NO affect in my personal spending, reinvestment in my business, or my hiring practices. It would take a small portion of my earnings stashed in savings and securities investments and transfer them into Oregon's economy.
If all of this talk of S-corps and LLPs has you thinking about about incorporating, here's a short primer from Oregon's Department of Revenue. If you have your own small business experience that has shaped your feelings about Measure 66 or Measure 67, what is it?