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Don’t be Stung by the S Corp “Sting Tax”

 

One of the most interesting but sometimes unknown laws that the Massachusetts legislature passed over the last few decades has to do with the treatment of “larger” S Corps similarly to C Corps in terms of tax rates. The law adds an additional tax that, if you are subject to it, is referred to as a “sting tax”.

As many of you are aware, the Feds now tax C Corps at a flat 21% rate but S Corps still may be taxed at the individual owners’ rate less a potential 20% deduction of the income (199a deduction). In Massachusetts for 2019, C Corps pay a tax at 8.0% of the taxable income in Mass. Due to the fact that S Corps flow through their income to their owners, and rates for individuals are now 5.05% in 2019, this amounts to a large 3% difference between these two rates.

As a result, Massachusetts has a rule that says if your S Corp’s GROSS revenue is more than $6,000,000 but less than $9 million, an additional tax of 1.93 % applies to the S Corp income and the entity must pay an additional tax. And if the S Corps’ gross revenue is more than $9 million, the sting tax is 2.9%.

We recommend that as your S Corp’s top line grows, you work with us at KN+S to determine the additional taxes you may owe in the state. It must be monitored so we don’t have any surprises.  And another word of caution, if you are an S Corp and selling your Company in an ASSET type of tax transaction, this could tip you into paying an additional state tax amount on the sale’s gain as well.  

Jeff Solomon, C.P.A., C.V.A., Managing Shareholder at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.

 
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Katz Nannis + Solomon PC
Katz Nannis + Solomon PC
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800 South Street Suite 250
Waltham, MA 02453
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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