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Tax News
NEWT Act Reintroduced
February 01, 2013
Legislative Actions
For those who keep up with the net investment income tax (NIIT) and the S-corporation planning touted by many practitioners as a solution for minimizing both NIIT and employment tax, here is a fresh news to keep in mind.  The Narrowing Exceptions for Withholding Taxes Act of 2013, or so called NEWT Act (purportedly named after former House Speaker Newt Gingrich) was reintroduced in the House this January 22 by Charles Rangel.  This Bill is not new. It was also introduced in the 112th Congress and even prior to that with the American Jobs and Closing Tax Loopholes Act of 2010 (Sec. 413 of H.R. 4213) but it never got traction. Now it resurfaces again at a time when, if enacted, it could trump all of this S-co planning that practitioners have been talking about. The Bill expressly covers businesses that provide investment advice or management and basically states that S-co shareholders that provide substantial services to such a business must count all of their pro rata share of the S-co income for employment tax purposes. Granted, the definition of a business that falls under the provision is not as broad as I described it immediately above. In essence, for now at least, it encompasses service S-corporations that are partners in partnerships, or S-cos with principal assets which consist of the reputation and skill of 3 or fewer employees. That sad, even under this rather narrow definition, many fund managers who choose to use S-corporations instead of LLCs could run into a  NEWT problem.  It is worth following this Bill through the legislative process, particularly for taxpayers who intend to adopt tax planners' advice and convert their LLCs into S-cos.
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Tags: employment tax, net investment income tax, NIIT, S-corporation, Section 1411, self employment tax