We Knew It Was Coming!

The passage of Obama Care created the 3.8% net investment income tax on all unearned income such as interest, dividends, rents, passive income, etc.  This extra tax only applies if your income is over a certain threshold ($200,000 single and $250,000 for married couples).  This tax does not apply to earned income of partnerships and S corporations where the partners or shareholders are materially participating and the income has not been subject to self-employment tax.

In doing various tax classes over the last few years, I almost always stated that it would only be a matter of time before the President would ask for this net investment income tax to be applied to S corporation and partnership income whether passive or material.  In the new budget proposal issued by the President, that time has come.

His budget proposes that all income of S corporations and partnerships be subject to the net investment income tax of 3.8%.  This would include any gains from selling any assets inside of these entities or selling the stock or partnership interest.  This will affect farmers who have large gains in the future.

For example, assume a farmer retires and sells 1,500 acres of good farmland for a $10 million gain in 2016.  Under current rules, this will be subject to a 20% capital gains tax of $2 million.  If President Obama’s proposal went into effect, then the tax would increase by $380,000 to $2.38 million.

This proposal is likely dead on arrival with the Republicans in Congress since they have already indicated that they are ignoring the President’s budget proposal completely.  But we knew the day was coming where this would on the table and that day is now.

Paul Neiffer, CPA