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Small Businesses Face Higher Taxes If "Edwards Loophole" Is Removed

Written by Ken Gaebler
Published: 6/14/2010

A proposed bill in the House could raise taxes on some small businesses as lawmakers consider closing "the John Edwards loophole."

Many small businesses could face higher taxes as House lawmakers work to change payroll tax laws in order to close what has been dubbed "the John Edwards loophole."

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The proposal would require principal owners in professional service S corporations to pay employment taxes on the company's profits, instead of just their salaries.

The Hill reports that former vice presidential candidate John Edwards saved at least $500,000 in taxes by paying himself just $360,000 in salary from his corporation, yet reaped another $26 million from the firm's profits - which were not subject to employment taxes.

Many small business proponents have said the change would be bad news for entrepreneurs. They say small businesses are already dealing with a difficult economy, and that the $11-billion tax would hurt small business growth.

Lawmakers say the money raised from the tax would be used to help pay for extended tax cuts, jobless benefits and other programs.

Dow Jones Newswires says that the new provision, which is still being developed, will have a very narrow focus. It would be specifically targeted at companies which provide services - exempting manufacturers and some other businesses - and have just a small handful of shareholders.

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