S-corporations have come under scrutiny by both federal and state tax officials who worry about attempts to dodge paying additional Medicare taxes. State tax officials, however, have seen no evidence they are being used as tax shelters.
Beginning in 2013, the Medicare tax on wages and self-employment income for S-corps increases to 3.8 percent on wages in excess of $250,000 for a joint return, and a 3.8 percent new tax on the lesser of net investment income or modified adjusted gross income exceeding $250,000, again for a joint return.
“With all the different requirements of the health care law it can be confusing,” said David M. Sullivan, tax administrator for the R.I. Division of Taxation. “It’s probably a different situation for every company that has to look at it,” he said.
The changes, he said, will not impact the division in a significant way and he doesn’t expect to see a surge in the number of S-corps. It is not a loophole meriting major concern, but “we are continuing to watch and track it,” he said. He is more concerned with the expiration of state credits for S-corps in enterprise zones and their effects on the state, for taxes filed in April 2013.
Thomas Rich, co-owner of New England Boatworks in Portsmouth, agrees. He is one of the many S-corps in the state located in an enterprise zone. Changes made in the state tax code in 2010 now prevent him from claiming tax credits for creating jobs, a difference he will see in his 2013 returns. “I’ve been aware of some new federal taxes on the way but it’s something we aren’t looking at yet,” he said. That’s because like many other S-corps, his company attempted to change the tax code to include the enterprise-zone credits, to no avail.
S-corps are “flow-through” company structures in which profits go directly to the owners, who pay income taxes on them. An S-corp does not pay corporate taxes but passes income through to the individual shareholders, who can report it as profits rather than wages in order to lower their tax burden.