Jones & Luscombe wrong on K-1 taxation K-1 taxation correction
Please be advisedthat the proposal for FICA taxation of K-1 income was incorrectly described by Jones & Luscombe (July 19-Aug. 15, 2010, page 12).
They stated that this provision would apply if the personal service income is attributable to three or fewer owners. In fact, this provision seems to apply irrespective of the number of owners, if the corporation is engaged in a professional service business and if the principal asset of the business is the reputation and skill of three or fewer employees!
The committee report accompanying this proposal states: "As another example, assume that two lawyers, Smith and Jones, form a law firm that specializes in criminal defense work. After several years of practice, Smith and Jones have each successfully defended a number of cases and the firm has hired associate lawyers and support staff to handle the cases brought to the firm based on Smith's and Jones' reputation and skill. In this situation, the principal asset of the business is the reputation and skill of Smith and Jones."
Currently this provision is attached to the extenders bill in the Senate, but should that bill fail to pass, I anticipate that this provision will be attached to other tax bills, as Congress is constantly searching for revenue-raising provisions!
Steven Bankler, CPA, PFS, CrFA, CFF
San Antonio
