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June 4, 2010

Yup you read it right.

My day started off so far quite good. A few minor distractions but all in all not bad. I had brunch with my daughter, got some client work done, signed up for a great website and got some good tips to help me grow my small business and feeling VERY focused. Right when I was about to finish my plan for the day I stumble upon a blog posted by Paul Obrien from that I’m not sure how I missed considering I try to keep up with the latest small business news from the IRS on a daily basis! At any rate the article left me feeling angry, upset confused and reminiscent of some things that are currently going on in the mental health industry in the south.

You can read the full article/blog here from (read it then come back)

Ok so now that you read it. In short, says through the American Jobs and Tax Loopholes Act of 2010 one of the provisions includes:

Death to s-corporations. This provision, which I criticized before, is still in the bill. The bill would impose payroll taxes on distributions from an S corporation engaged in a professional service business that is principally based on the reputation and skill of 3 or fewer individuals or an S corporation that is a partner in a professional service business. Professional service is a pretty broad term and would include “health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.”

Either someone in Congress has a deep rooted hatred for small businesses or we as professional service providers have a bit of identity crisis. Why? Simple, they figured out what a lot of solo business owners figured out long ago, probably through the help of some very smart business advisors, how to save on employment taxes by setting up as a s-corp.

 For those who do not know; a S-Corp is basically a way a sole proprietorship(SP) or general partnership (GP) can extend liability to its company, be treated like a corporation for tax purposes but still act like a sole proprietorship or partnership. As a SP or GP you and/or partners are the business thus all the liability and tax burden goes to you. Plus you are required to pay an additional 15.3% in self-employment tax on the ENTIRE amount of your income, which obviously you want to avoid if possible. S-corps are attractive for many micro and solo small businesses because you basically get the best of both worlds. Instead of all profit going to you as income, you only pay payroll taxes on your salary among some other perks. Giving individuals who own their own jobs more control. The IRS knows this and places some restrictions on who can elect to be an S-corp, if your business is one of service where your direct service is your business (health care providers, barbers, hairstylist), you cannot elect to be an S-corp, but all in all it still gives many service businesses an opportunity to be s-corps and receive the tax benefits of doing so. This is how it has been and is a fairly decent proposition up until now. The new bill basically says that businesses owned by less than three people can no longer afford this luxury. Thus if you are in business by your self or one other person, and you are an s-corp, you can kiss that and the tax benefit goodbye!

 The point of the American Jobs and Closing Tax Loopholes Act of 2010 was to do the former, create American Jobs but as you see through the “Tax Loopholes” part they squeezed in some tax provisions on the sneak like no one would notice sort of like me trying to get into a size 10 jeans again, I might be able to do it but seriously?  

 I can’t even begin to tell you how confused and upset I am about this. Confused because this is the same government that just last week I was singing their praises for attempting to help small business by encouraging us to hire employees, and offer them health insurance, small business lending and also extend unemployment. This is the same government that sponsored the National Small Business week and talks about how small businesses are cornerstone of this great county. But through my anger a moment of clarity emerges. Why would they do this? Because there has to be SOME way to pay for all the new tax benefits that have just passed! Here are my four other reasons this is a bad idea:

  1. More tax evasion. As an accountant and one who is asked weekly from business owners about how to structure their business for tax purposes, I see in the faces of all these business owners that they want to do what’s best for their business and the country. They want to pay their fair share of taxes but also know that it’s difficult to do it when they struggle to keep their businesses open to begin with. Along comes S-Corp which gives these businesses a chance and now you take it away. I suspect, though I won’t advise, more people will “take their chances” and figure ways to avoid reporting full income earned through their businesses. It makes my job harder in some ways as I try to educate on the total opposite.
  2. Discourage new business growth. Well it probably won’t but it doesn’t do much to encourage it! The only alternative businesses have is to either form C-corps or merge large S-corps the latter requiring a lot legal interaction and may not always be realistic for a lot of service businesses nor will many of them have the knowledge to do so.
  3. Minority Small businesses are can be the effected the most. Census statistics show over 50% of businesses are professional service businesses and are owned by women and other minorities. As a black woman in with my core business being in professional service, these facts are alarming in light of the new tax provisions. The bill includes provisions for industries that minorities just aren’t part of and black women in particular are leaders in professional services from the beauty salon, to social media consultants like Therefore this bill could affect us the most as in what and Joe Kristan says (via Taxgirl site) :

It would penalize the smallest personal service providers to the benefit of their larger competitors. A sole proprietorship would pay taxes at a rate at least 2.9% higher than a competitor whose “principal asset” is the reputation of more than three employees.

 4.    Doesn’t do anything to improve Government trust. I mean really I don’t think I need to say more.

 It’s very obvious that when the government says “small business” they are only talking about product driven businesses or businesses that help keep foreign competition at bay. NOT the professional services that support these businesses and the minorities that run them. The law extends tax breaks to the film industry, mining, energy, technology and motorsports; industries women and other minorities are disproportionately represented. We seem to have an identity crisis. Accountants, architect, barber shops, consultants, business coaches and the like keep all other businesses going. True what we do at times cannot be tangible, but we are the heartbeat of companies.

It’s the whole BIG corporate mindset, when I worked in Corporate accounting, I often heard middle management say, that “we” don’t get the great perks or recognition that Marketing, product development or sales departments do because we don’t generate revenue for the company. We are just support and basically don’t matter (that last part were my own thoughts but I’m sure some arrogant sales or marketing exec thought that!) I’m angry about this and hope organizations like NASE are on the case now on behalf of professional service businesses and the micro and small businesses across this country to advocate on our behalf. In the meantime, you can write your congressman, join the NASE and share your outrage, but whatever you do, please contact your CPA, Tax advisor, Small Business Accountant and/or Bookkeeper to make sure you make the necessary changes now to avoid a hefty tax bill once this law passes. sums it best: “Congress Hates Small Businesses”. I concur and add that they must also REALLY hate minority small business the most.


From → tax laws

  1. Thanks for sharing this. I am a woman who is seriously focusing on starting a new business in bookkeeping and this is very disheartening. I guess I am more cynical than you regarding our Federal Government. Small business owners, whether sole proprietors or S-Corps, are an amazing group of people. They love the challenge of success against the odds, many have a mindset that actually includes a lot of giving back to the community, coming along side others who are in the same boat.
    At this time, our Fed Govt does not understand this. They believe that Govt is the source of all good things and that everyone should love being dependent on the good will of Govt. They also completely misunderstand that the small business owner is taxed on profit as their income, not as investment (thus through capital gains taxes).
    I too am “mad as hell and don’t want to take it anymore” and will be voting very carefully this fall.

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