According to the experts at Tax Savings Professionals, President Obama released a nearly $4 trillion budget proposal for 2015 that includes more plentiful tax breaks for working families while limiting breaks for the rich. Among the issues on the table, up for discussion, negotiation and proposed legislation are caps on “Itemized deduction & Exclusions,” lowering the “Estate Taxes” with a return to 2009 tax exemption levels, and a host of certain tax reforms and tax breaks coveted by small businesses.
“The budget proposal contains certain tax reforms to tax breaks coveted by small businesses,” says Bob Barth, Tax Director at Tax Savings Professionals, “coincidentally, these provisions also are almost identical to those offered by Dave Camp (R., Mich.) Chairman of the House Ways and Means Committee.”
According to Barth, a veteran tax attorney, both of the plans have a provision that says S corporations [partnerships and limited liability companies] would need to conform to the self-employment tax that sole proprietors now pay,” says Kyle Pomerleau, an economist at the Tax Foundation, a nonpartisan tax-policy think tank in Washington, D.C. “That’s going to increase [business owners’] tax liability.
Unlike sole proprietors, limited partners of a partnership (including limited liability companies) and shareholders of an S Corporations can shield much if not all of their income from self-employment taxes.
While a general partner’s earnings are subject to self-employment taxes, their “distributive share” of partnership income isn’t. Similarly, an S corporation shareholder, who is an employee, is subject to regular employment taxes on his or her wages. But this person isn’t subject to self-employment taxes on S corporation distributions.
Barth points out that the effect would be that partners and S corporation shareholders who “materially participate in the trade or business of the partnership or S corporation” would be required to treat 70 percent of their combined income–that is, compensation and proportionate business earnings–as net earnings from self-employment. As a result, that income would then be subject to self-employment taxes (or employment taxes in the case of S Corporations).