Another measure is the 24,000 tax discussion threads on Intuit's Tax Almanac. The top ten threads in terms on number of views include a number of S Corp topics, some with tens of thousands of views.
The hottest topic is compensation and the reason is pretty simple. Salaries paid to owners of S Corps are subject to FICA and Social Security taxes. The profits distributed are not so there's a tendency for owners to underpay themselves to avoid taxes. It's a phenomenon the Internal Revenue Service keeps an eye on.
That's where the current action on Capitol Hill comes in. So far, attempts to extend payroll taxes to distributions, particularly for S Corps that operate in the professional services market, haven't gone anywhere. But most observers think another effort will be made and that's because if tax credits and cuts are going to be extended, many legislators think they need to be paid for from other sources, such as S Corps.
There are some guidelines for how much salary S Corp shareholders should draw.
"The rule of thumb, if you are taking a reasonably salary out 50/50 [50 percent salary, 50 percent profit], the IRS is probably not going to be pay you too much attention," says Mark Edgar, a CPA based in Aurora, Colo., who has 50 to 60 S Corp clients.
Edgar works, not always successfully, to get clients to take an appropriate salary. When he can't, as in the case of a client who had $100,000 in salary and took a $1 million distribution to purchase a building for the company, Edgar makes sure the paper trail "is squeaky clean." In this case, they never heard from the IRS.
It's this potential for abuse by low balling owners' salaries that has government on alert. "The GAO [Government Accounting Office] came out with a study saying there is a lot of abuse in S Corps," notes Mark Luscombe, principal tax analyst for CCH. There are two areas of abuse, using low salaries to avoid taxation, and overstating shareholder basis to claim losses.
But S Corps are the most popular form of business organization and that trend doesn't seem to have diminished even though there are lots of traps and it's clear from the Tax Almanac discussions that lots of clients fall into them. "Once you think you’ve got it figured out, there’s some weird exception that pushes you back into the direction of a C corporation," says BNA's Calhoun. Luscombe says LLCs provide a lot of the same benefits without the traps, but that hasn't affected the interest in S Corps.
And as far as the exemption of distributions from payroll taxes, Calhoun anticipates, "Congress may try to shut it down. It’s a perceived loophole."
