Tax News Flash

Legislative Update: Employment Tax Rule Changes for Partnerships, Limited Liability Companies, and S Corporations in Professional Services Businesses Under the American Jobs and Closing Tax Loopholes Act

Provisions in H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, would significantly change the employment tax rules with respect to partnerships, limited liability companies, and S corporations in professional services businesses—i.e., trades or businesses substantially all of the activities of which involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.*

* The term “substantially all” is not defined for this purpose.

Effective for tax years beginning after December 31, 2010, very generally, the bill would require certain service provider partners and shareholders in these businesses to take into account their distributive shares of the businesses’ operating income in determining self-employment tax. The bill does not provide for any portion of the service provider partner’s or shareholder’s distributive share to be excluded from the self-employment tax as a return on capital.

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