Newt Gingrich also released his tax returns recently. His returns are slightly more interesting to look through than Romney’s even though they are much simpler and he is not nearly as rich as Romney. He is still very rich and has a much larger income than most of us can ever expect.
Newt’s revelation that his first name is Newton is nowhere near as interesting as Romney’s first name revelation. Newt pays a tax rate of 32%, more than double Romney’s, but Newt’s company is owned by Newt and pays no income taxes on its own. All it’s income flows through and is taxed only once directly to Newt, whereas Romney’s company is taxed at both the corporate and individual levels.
Newt’s tax returns are fairly simple and he does not appear to take too many aggressive tax positions. Except one. His corporation is an S corporation and most of the income of the corporation is related to personal services of Newt and his wife. He takes what you and I think is a substantial salary from the corporation of about $252,000. He also paid taxes on the $2.5 million of income the corporation had. But he effectively avoided paying 2.9% in medicare taxes on the income of the corporation. The IRS states that an S corporation for which most of the gross receipts and income are related to personal services of the owners should pay most of the profit as salary rather than have it taken as income avoiding the 2.9% medicare tax.
This issue has been the subject of numerous audits and several tax court cases and the IRS has prevailed consistently. This is the one issue that opens Newt up to audit and a potential significant liability. Newt did take distributions from the corporation of around $2.5 million during the year, so he cannot argue that the corporation needed to retain those profits to help in building the business. This indicates that the IRS could argue that Newt underpaid his federal income taxe liability by about $72,500 plus penalties and interest.
Newt’s tax advisors are good accountants and argue that this is a perfectly legal method of accounting for Newt’s income and taxes. It may be. Many tax preparers and businesses use similar tactics although I have rarely seen the difference between salary and distributions as significant in a high income taxpayer. And it would be unusual for a situation where the largest part of the income of the business is derived from personal services of the owner to have such a significant difference. It has been my experience that the IRS has become much more aggressive on this issue in recent years. It would be interesting to see Newt take this to tax court and find out how they would rule in a high profile case.
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Contact UsJohn Gallo, CPA
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