Paul L. Caron

Wednesday, September 30, 2009

Schwidetzky: Integrating Subchapters K and S

Tax Lawyer LogoWalter D. Schwidetzky (Baltimore) has published Integrating Subchapters K and S—Just Do It, 62 Tax Law. 749 (2009). Here is part of the Introduction:

The Code contains two “pass-through” tax regimes for business entities. One is contained in Subchapter K, which applies to partnerships, the other in Subchapter S, which, unsurprisingly, applies to S corporations. In the main, both Subchapters tax the owners of the entities rather than the entities themselves. Having two pass-through tax regimes creates obvious administrative and other inefficiencies. There was a time when S corporations served a valuable purpose, particularly when taxpayers needed a fairly simple and foolproof pass-through entity that provided a liability shield. But limited liability companies (LLCs), which are usually taxed as partnerships, in most contexts make S corporations obsolete. LLCs too can be fairly simple and foolproof, while providing the superior tax benefits of the partnership provisions of Subchapter K. The advent and popularity of LLCs means that the inefficiency created by two separate pass-through tax regimes can no longer be justified. I propose that a new pass-through regime be created that retains Subchapter K and incorporates the best parts of Subchapter S, with the balance of Subchapter S repealed. Integrating these two pass-through regimes requires that some changes be made to the C corporation provisions of Subchapter C as well. I also make Subchapter K available to most nonpublic C corporations, putting most closely held businesses on a level playing field.

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reading this article reminds me why i hire a tax consultant

Posted by: SEO Consultant | Sep 30, 2009 10:25:54 AM

Every single one of practicing CPAs that I know and who have discussed types of organizations with me all agree that it is best for a small business to form an LLC for simplicity but to check the box to have it taxed as a corporation with Sub-S status for tax purposes. The main reason is to have some of the company earnings, which were produced by the company rather than the sole efforts of the owner himself, to be passed through as income not subject to social security tax. As it is, the owner still has to receive a W-2 that is reasonable compensation for his contributions.

Here's an example:

S Corporations Help Small Business Owners Save On Taxes
Vice presidential candidate John Edwards saved $600,000 with his S Corporation

Now, Edwards might save taxes with his new child deduction, although the filing married option is out.

Posted by: Woody | Sep 30, 2009 9:51:23 AM