OUR THOUGHTS ON:

Democratic Lawmakers Put S Corporations in Their Sights to Fund Freeze of Student Loan Interest Rates

Tax

By Ron Kramer

Democrats in the Senate and House have put forth companion bills aimed at funding the cost of lowering the interest rate on college student loans. The bills would have certain S corporations become liable for payroll taxes in order to offset the $5.9-billion price tag of preventing Federal student loan rates increasing by July 1. The rates are scheduled to increase to 6.8 percent from the current rate of 3.4 percent. Both Democratic and Republican lawmakers would like to keep the low current rate in this economy, but as usual, the fight is over how do we pay for it. Raise taxes?!

Senate Democrats have put forth The Stop the Student Loan Interest Rate Hike Bill of 2012 (Sen 2343), and House Democrats have prepared a companion measure, the Narrowing Exceptions for Withholding Taxes (NEWT) Bill of 2012 (HR 3840). The bills would make all S corporation shareholders who earn more than $250,000 ($200,000 single) in an S corporation engaged in a professional service business in which 75% or more of the gross income of such business is attributable to three or fewer shareholders, subject to payroll taxes.

Senate Democrats have provided the following summary of the bill:

Summary of the Stop the Student Loan Interest Rate Hike Act of 2012

The Stop the Student Loan Interest Rate Hike Act of 2012 

  • Interest rates on subsidized Stafford loans are set to double from 3.4 percent to 6.8 percent on July 1, 2012.
  • This legislation will maintain the Federal student loan interest rate at 3.4 percent for an additional school year.
  • The cost of a one-year extension is $5.9 billion and is covered by closing a tax loophole that certain professional service businesses use to avoid employment taxes.
  • This proposal closes the loophole by requiring those with incomes over $250,000 to include, for purposes of employment taxes, income received from a Subchapter S Corporation or limited partnership interest in a professional services business.
  • An S Corporation does not pay corporate taxes but passes income through to the individual shareholders, who can report it as profits rather than wages in order to lower their employment tax burden.
  • The proposal is targeted only to those S Corporations that derive 75 percent or more of their gross revenues from the services of three or fewer shareholders or where the Subchapter S Corporation is a partner in a professional service business.

President Obama has cited the legislation in recent campaign speeches on college campuses, and Republicans have charged that the legislation is just another political ploy intended to make Republicans look bad (as not being in favor of the wealthy paying their “fair share” of taxes) prior to the November elections since they are likely to oppose the legislation when it comes up for a vote. A vote on Sen 2343 is expected in the Senate soon after lawmakers return from recess on May 7. Looks like another piece of legislation going nowhere. 

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