500,000 S Corporation Owners Nationwide Targeted for Tax Hike

Yesterday, the S Corporation Association (a Washington, D.C.-based organization devoted to promoting and protecting the interests of America's 4.5 million S corporations) released a study from top accounting firm Ernst & Young that makes clear that failing to extend the current top rates on individual, business, and investment income is detrimental to small businesses and for jobs and investment.

An S corporation, for federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any federal income taxes; rather, the corporation's income is divided among and passed through to its shareholders and taxed under the personal income tax.

Many CBIA small business members are S Corporations (and saw their state income taxes increase when Connecticut raised personal income tax rates) and according to the study, raising top tax rates on these types of firms would result in a smaller economy, fewer jobs, less investment, and lower wages. The study finds that, over time, the economy would shrink by 1.3 percent with nearly three quarters of a million fewer jobs. The study also found that more than 72 percent of S corporation income is earned by the 500,000 S corporation owners who pay the top two rates.

Authored by Dr. Robert Carroll and Gerald Prante, the new study estimates the effects of the policy advocated by President Obama and some members of Congress to allow the top tax rates paid by business owners to rise sharply starting January 1 of next year. The study also measures the number of business owners and amount of business income targeted by the higher tax rates.

Specifically, the study looked at the effects of allowing the top rates on individual and pass-through income, capital gains, and dividends rise to their pre-2001 levels together with the addition of the new 3.8 percent tax on investment income. The study emphasizes that this policy would raise the top tax rate on S corporation and other pass-through income from 35 percent to nearly 45 percent.

Here's a link to the complete study (pdf).