With elections coming in November, 2010 it is doubtful that a major tax bill will be passed in the next 4 months, but what we are seeing is “revenue raisers” being attached to spending bills as an offset. One such measure is a Social Security increase on small personal service firms.

Subchapter “S” Corporations

The income tax law has long allowed small business owners to form a corporation to limit legal liability but for tax purposes to make an “S” election to treat the Corporation as a flow through entity. Typically you would see this in entities that practiced law, accounting, medicine, sports, engineering, architects, consultants, etc.

Owners or partners of such firms would typically take a small salary and pay the remainder of the profits to themselves as a dividend. What was the tax benefit? Suppose the business had a profit of $200,000. The owner would take a salary of $50,000 and pay themselves a dividend of $150,000. The salary would likely bear an income tax of 25%, be subject to Social Security and Medicare at 15.3% and the owner would pay a 15% tax on the dividend income.  The total would likely be about $40,000.

A new “revenue raiser” will now treat the entire $200,000 as salary and subject the entire amount to Social Security and Medicare at 15.3%. So going forward the total tax that will be paid by this owner or partner is likely to be closer to $100,000.

This will likely end the tax advantage of electing “S” status for small business owners.

IRS to Impose New Regulations on Tax Preparers

Anyone who prepares a tax return for a fee will now have to register with the Internal Revenue Service. Tax preparers will now have to prove that they are current on their own tax filings, that they do not owe any back taxes and that they have never been convicted of a felony. All preparers will have to either obtain a preparer identification number or renew the registration of the one they have. All preparers will have to use the preparer identification number on 2010 tax returns.

Competency testing and continuing education (15 hours a year) will be mandatory, except for attorneys and certified public accountants. Electronic filing will be mandatory commencing with 2011 tax returns.

Report of Foreign Bank and Financial Accounts

Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts had a filing due date of June 30, 2010. Over the years U.S. taxpayers living outside the United States have treated the filing of this Form rather casually and the Department of the Treasury in turn rarely imposed penalties for late filing or failure to file. In addition, many taxpayers erroneously believe that the extension of time until October 15, 2010 to file Form 1040 also extended the time to file Form TD F 90-22.1.

If you failed to file Form TD F 90-22.1 by June 30, 2010, but intend to do so by October 15, 2010, you should be aware that in addition to filing the Form TD F 90-22.1 with the Department of Treasury in Detroit, MI, you now also need to file an additional copy of the Form TD F 90-22.1 along with an additional copy of your 2009 Form 1040 to:

            Internal Revenue Service

            11501 Roosevelt Boulevard

            South Building, Room 2002

            Philadelphia, PA 19154

            Attn: Charlie Judge, Offshore Unit, DP S-611

In addition to the aforementioned Form TD F 90-22.1 and Form 1040, you need to include a letter of explanation as to why you failed to timely file Form TD F 90-22.1. If the Internal Revenue Service finds your reason for the delay in filing to be unacceptable, you should expect to pay a penalty for failure to file up to $10,000.

Summer Jobs for Students and Roth IRA’s

Is your child or grand child working this summer for spending money for high school or college? If so, consider making a contribution for them to a Roth IRA. You can put in either the amount the child will earn or $5,000, whichever is less. And all withdrawals after 59 ½ are tax free. By that age, the $5,000 will likely have grown to $150,000 or more.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.