Changes to S Corporation Rules: Dead or Just Sleeping?

published July, 2010

HR 4213 appears to have been blocked from passage, but they’ll be back in session July 12. There was a vote to reconsider a motion on an amendment to the bill because debate had not been formally ended by “invoking cloture.” Not too clear!

The original bill passed both the House and the Senate, but with differences between the versions. The senate committee trying to resolve the differences before it goes to the President seems to have dropped the ball, at least for now. This doesn’t mean it won’t come back at some point. Law is fun because you can always change things. Whee!

Please google your senators and tell them if you have an S Corporation (or if you don’t!) that with regard to HR 4213 Section 413:

  • punishes smaller firms and favors larger businesses. This does not create a level playing field.
  • The IRS should work to find a “reasonable wage” standard to determine who is “evading” payroll taxes, rather than taking away the S Corporation.

You can check the latest actions at

If you missed this last month, they’re trying to take away the exclusion for distributions from SE tax in “Professional Service Businesses” if the principal asset of the firm relies on 3 or fewer employees’ reputation and/or skill. If you’re not in a defined “Professional Service Business” or if you have more than 3 key employees, this doesn’t affect you.