Joe Biden used the loophole in the tax code that Obama tried to close

Democratic presidential candidate Joe Biden used a tax loophole the Obama administration attempted and failed to close, drastically reducing his tax bill.

Mr Biden and his wife Dr Jill Biden funneled their income from books and speeches through S corporations, according to tax returns the couple released this week. They paid taxes on those profits, but the strategy allowed the couple to avoid the 3.8% self-employment tax they would have paid had they been compensated directly rather than through the S.

The tax savings reached $ 500,000, compared to what the Bidens would have owed had they been paid directly or had Obama’s proposal become law.

“There is no reason for these to be in an S corporation – none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

“As evidenced by their effective federal tax rate in 2017 and 2018, which topped 33%, the Bidens are committed to ensuring that all Americans pay their fair share,” the Biden campaign said on Wednesday in a statement. communicated.

The technique is known in tax circles as the Gingrich-Edwards loophole – to former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat – whose tax strategies have been scrutinized and sparked calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current 2020 Democratic nomination contestants Sens. Elizabeth Warren and Bernie Sanders, received their income from books or speeches differently and paid self-employment taxes.

Some tax specialists have dotted in pieces President Trump’s financial disclosures and leaked tax returns to suggest he used a similar tax avoidance strategy.

Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration opposes the House Democrats’ attempt to use their statutory power to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism for contrasting Mr. Trump.

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Mr Biden, who served as vice president from 2009 to 2017, has led the Democratic pack in the polls since entering the race. He is campaigning for higher income Americans to pay more taxes and to close tax loopholes that benefit the rich.

Mr Biden has denounced the proliferation of such loopholes since Ronald Reagan’s presidency and said tax revenues could be used, in part, to help fund initiatives to provide free tuition at community colleges or fight against climate change.

“We don’t have to punish anyone, including the rich. But everyone should start paying their fair share a little. When I am president, we will have a fairer tax code, ”Biden said last month during a speech in Davenport, Iowa.

The United States imposes a 3.8% tax on high-income households, defined as individuals earning over $ 200,000 and married couples earning over $ 250,000. Employees see part of the tax deducted from their wages and pay part of it on their returns. Self-employed business owners also have to pay. People with investment income also pay 3.8% tax.

But people who derive profits from their active involvement in businesses may claim that such income does not constitute compensation or investment income. The Obama administration proposed to close this gap by requiring that all such income be subject to a 3.8% tax, and it was the biggest item in a list of “loopholes” in a plan. that Mr. Obama released during his last year in office. The administration estimated this proposition, which failed to advance in Congress, reportedly raised $ 272 billion from 2017 to 2026.

Under current law, owners of S corporations can legally avoid paying 3.8% tax on their profits as long as they pay themselves “reasonable compensation” subject to regular payroll taxes. S corporations are a commonly used form for private businesses in which profits are transferred to the owners’ individual tax returns and taxed there rather than at the corporate level.

The difficulty lies in defining reasonable compensation, and the IRS has had mixed success in challenging business owners on the issue. The S companies of Bidens — CelticCapri Corp. and Giacoppa Corp. — reported more than $ 13 million in combined profits in 2017 and 2018 that were not subject to self-employment tax, when these companies paid them less than $ 800,000 in wages.

If the full amount were considered compensation, the Bidens could owe around $ 500,000. An IRS investigation might come to a somewhat short conclusion.

“The salaries earned by the Bidens are reasonable and have been determined in good faith, taking into account the nature of the entities and the services they have rendered,” the Biden campaign statement said.

For businesses that generate money from capital investments or a large workforce, less profit comes from the owner’s labor, and therefore reasonable compensation may be lower. For companies whose profits are largely attributable to the owner’s labor, it is more difficult to justify reasonable compensation well below the profits.

Since the Bidens’ profits came directly from the couple’s advice and public speaking, “treating them as anything other than compensation is pretty aggressive,” said Steve Rosenthal, senior researcher at the Tax Policy Center, a research group led by a former Obama administration official.

Mr Nitti said he uses an “sick appeal” rule for his clients trying to navigate the issue of reasonable compensation: if the owner made himself sick, how much money the business could she still win?

“The standard of reasonable composition is nebulous,” Mr. Nitti said. “It’s pretty cut and dried. Whether you speak or write a book, it is all because of your efforts.

The IRS puts more energy into cases where business owners pay so little in reasonable compensation that they owe the full Social Security and Medicare payroll taxes of 15.3%, Mr. Nitti said.

In a statement released Tuesday with the candidate’s tax returns, the Biden campaign noted that the couple employed others through their company S and called businesses a “common method for taxpayers who have sources of income. external to consolidate their income and expenditure “.

Write to Richard Rubin at

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