Forbes: Gingrich Used Payroll Tax Ploy Often Attacked By IRS (avoided paying part of Medicare tax)

[highplainsdem]

http://www.forbes.com/sites/janetnovack/2012/01/22/gingrich-used-payroll-tax-ploy-often-attacked-by-irs/

Newt Gingrich avoided tens of thousands of dollars in Medicare payroll taxes in 2010 by using a technique the Internal Revenue Service has consistently and successfully attacked. Republican Presidential candidate Gingrich and his wife, Callista, treated only $444,327 of what they got from Gingrich Holdings. Inc. and Gingrich Productions as compensation to them, while reporting a whopping $2.4 million of their earnings from these corporations as profits or dividends. Medicare taxes are levied at a rate of 2.9% on an unlimited amount of compensation and self-employment income (say, from a consulting contract, speeches or a book) but not on profits from a business.

“It appears that he is not paying his fair share of Medicare tax,’’ Robert E. McKenzie, a partner in the Chicago law firm of Arnstein & Lehr LLP concluded, in an email to Forbes, after reviewing Gingrich’s 2010 tax return. McKenzie, a past chairman of the Employment Tax Committee of the American Bar Association Tax Section and a member of the IRS’ Advisory Council, added: “There are a multitude of cases where the IRS has successfully challenged the improper tax strategy of this candidate and his accountants. Service businesses are only allowed to distribute a fair return on investment from an S corp. as profits exempt from Medicare taxes. The remainder of profits must be paid as salary subject to a 2.9% Medicare tax levy.”

Since Gingrich released his 2010 tax return Thursday night during the Republican debate, news coverage has focused on his hefty income tax rate—he paid tax equal to 31.5% of his adjusted gross income of $3.14 million. By contrast, former Massachusetts Gov. Mitt Romney, who earned a fortune at Bain Capital and gets most of his income from investments, acknowledged last week that he pays closer to 15%. (Romney, still smarting from his South Carolina loss Saturday to former House Speaker Gingrich, said on Fox News this morning that his unreleased returns had become a “distraction” and that he will release his 2010 return on Tuesday.)

The issue of Gingrich’s Medicare tax, however, has started to attract notice from tax pros like McKenzie. The IRS says on its web site that distributions to an S corp. owner should be treated as compensation to the extent they are associated with his personal services or services to the firm. Earnings that come from an investment of capital and equipment, or from the work of others, can be treated as profit. On his July 2011 financial disclosure form, Gingrich valued his holdings in Gingrich Productions at between $500,000 and $1 million, suggesting he has far too little capital invested in the firm to justify booking $2.4 million as profit. On Gingrich Productions’ web site, there is no suggestion it profits from the work of anyone other than the Gingriches. The site says: “Together, Newt and Callista host and produce historical and public policy documentaries, write books and newsletters, give speeches, record audio books, produce photographic essays, and make television and radio appearances.” (From public filings, it appears that Gingrich Holdings Inc. changed its name to Gingrich Productions last year.)

-snip-

[elleng]

1. And this from FORBES!

They ARE after him, aren't they???

[David__77]

2. So what are the actual rules? Can firm principals take dividends? Or must it be income?

And is there guidance on this? I think it's technically legal.

[Travis_0004]

3. You must have a financial stake in the company

You must have a financial stake in the company.

Lets say you are a CEO. If you didn't hold that job, you would pay somebody 500,000.

Then since the fair market rate for that position is 500,000, you must pay yourself 500k. If you pay yourself less than the market rate, you can get an IRS audit.

Since you are making more than the market rate, there has to be a reason, and that reason is you are taking a return on your investment. So yes, what Newt did is legal.

Lets see how much he saved on taxes:

If he claims it all as income, then the business pays 0% (since wages are a deduction):

Newt would pay 35% personal income tax, and 2.9% medicare, for a total of 37.9%

Now, the portion he claims as a dividend, his corporation would pay 34-39% tax (you can not write off dividend payments), then newt would pay 15% tax as capital gains, so it looks like the way Newt is paying himself cost 10% more in taxes. I know he has lawyers and tax advisers helping him, so this is certainly not the case. Any CPA's on this forum that can explain where the savings comes in from paying yourself taxes this way.

I understand treating income as a dividend in an S corp, but that is any easy decision since there are no corporate taxes to deal with an an S corp. I just don't see the savings in a C corp.

[joeglow3]

5. You don't get cap gains. rates on S-Corp distributions

Income from an S-corp flows out to the owners. The question is: is the money received income from a business or income earned from services. If it is a normal business, all expenses (including salaries) are included and the net income (or loss) flows out to the individual owner (on a schedule k-1), who claims it on their return. If it is all income for services performed by me, I would owe income taxes on the same amount PLUS payroll taxes.

The question is did Newt just include his normal income producing activities in an S-corp in an attempt to avoid paying payroll taxes. It appears to be yes.

[ProgressiveEconomist]

4. At the least, a thorough IRS audit

IRS audit of Gingrich's taxes now seems unavoidable. That audit most likely would look at Gingrich's previous tax returns going back many years. what he thought he could get away with in 2010 is likely to be the same as what he tthought he could get away with in prior years. If his 2011 return does not show the same impossible "profits" on his and Calista's own "work" and puny capital, that would be tantamount to an admission he's a Medicare tax fraud.

Should Gingrich become the Republican nominee, a great question to ask him might be,
"Will you release all tax returns the IRS is examining for your Medicare tax fraud, exposed in the 2010 tax return you've already released?"

Then, every penny of his "consulting" payoffs from large corporations with business before Congress during the past decade or so will become fodder for the campaign against him.

[DCKit]

6. Dog, what a dumbass.

The hubris is stunning.

Of the bunch, Newt, Mittens, Perry, and Paul likely knew for two or more years that they'd be running for pResident, but some (Mitt and Gingrich) didn't think to file honestly and pay a little more to look honest and responsible.

Of course, they'll turn it around and claim that "Obama's IRS" is crawling up their asses in a political vendetta.