The S-Corporation Association, a Washington, D.C.-based nonprofit that advocates for family-owned and closely held businesses, is warning of a proposed new federal tax hike on S corporation shareholders and other pass-through business owners.

The tax measure, contained deep in President Obama’s 2017 budget proposal, is an expansion of the Net Investment Income Tax.

The Net Investment Income Tax

The NIIT was passed to help finance the Affordable Care Act and is intended to tax the investment income of taxpayers earning more than $250,000.

The tax, currently at 3.8%, applies to dividends, capital gains, and other forms of investment income.

It also applies to the active business income of S corporation shareholders, partners, and LLC members--but only if they are not active in the operation of the business.

In other words, if they work at the business, the 3.8% NIIT does not apply.

The Obama Administration’s proposal would apply the NIIT to all pass-through income regardless of whether the taxpayer is active in the business.

Consequences

The result would be a 5% increase (from 39.6% to 44.6%) in the top rate on all pass-through business income, further widening the gap between the top tax rates on pass-throughs and the 35% top rate paid by C corporations, with whom they compete.

S-Corp Association also points out that the administration’s interest in hiking taxes on pass-throughs comes as it has been voicing support for cutting the rate on C corporations to 28% or less.

However, the group says the president’s budget proposal , with the proposed tax hike, is not likely to pass.

For more information, contact CBIA’s Bonnie Stewart (860.944.8788) | @CBIAbonnie