By Ryan Ellis
Democratic presidential candidate and former Vice President Joe Biden this week released several years of income tax returns, probably hoping the story would be that he did so and President Trump has not.
However, Richard Rubin from the Wall Street Journal found a much more interesting nugget: in 2017 and 2018, Joe Biden and his wife ran $13 million of profits through two subchapter-S corporations. In so doing, they avoided $500,000 in Social Security and Medicare taxes they would have paid if they instead reported the income as sole proprietors directly on their 1040 income tax returns.
That’s because profits from an “S-corp” are subject to federal income tax, but not to the Social Security and Medicare tax. This is not true for sole proprietors, who are liable for both layers of tax in full.
Biden, incidentally, is campaigning in favor of an across-the-board tax increase.
If this all sounds familiar to veteran politicos, it’s the same tax problem that helped bring down Democrat presidential candidate John Edwards in 2004.
To be clear, the use of S-corps is a perfectly legal tax avoidance strategy deployed commonly in family businesses across the country. It is not tax evasion, but it most certainly is a tax strategy — and if one takes Biden’s history on the matter seriously, it’s a tax strategy he thinks is a loophole.
To be equally clear, Joe Biden is a hypocrite for using S-corporations in this way for at least four reasons. This is, after all, a man who said that paying more in taxes was a “patriotic act.”
Biden is running on a huge tax hike for the rest of us. He’s now scrambling to limit the damage, but Joe Biden has been called out for running on a blanket repeal of the Trump tax cuts, and has done so at least ten times.
That means raising tax rates across the board for all taxpayers, cutting the child tax credit and standard deduction in half, forcing 5 million families back into the alternative minimum tax, raising taxes on family-owned businesses, and once again having one of the highest corporate income tax rates in the world. Biden, on top of this, also wants to raise the capital gains tax to its highest level in living memory. Don’t believe me? It’s all on his campaign website.
Now that the Bidens have gotten their tax breaks, they want to take them away from everyone else.
Biden has called for most S-corporation profits to be subject to Social Security and Medicare tax. The last budget of the Obama-Biden administration proposed subjecting most S-corp profits to Social Security and Medicare tax, calling the strategy the Bidens used on their taxes a “loophole” for “high paid professionals.”
The Biden presidential campaign website, presumably referring to such maneuvers, says “we need to eliminate special tax breaks that reward special interests.”
Biden minimized the profits subject to Social Security and Medicare tax by paying himself a tiny “reasonable salary.” The IRS is well aware that business owners like Biden can use S-corps to avoid paying Social Security and Medicare tax. So, the IRS requires S-corp owners to pay themselves a “reasonable salary” in the form of a W-2 wage subject to FICA tax. That way, at least some S-corp profit is subject to Social Security and Medicare tax. The idea is to make a distinction between the part of the S-corp profit which is the owner’s labor, and the part which is a return on his capital.
A source of annoyance for tax professionals is that the IRS has never defined “reasonable.” But it’s safe to say that the Bidens are on the low end of the scale here. Out of $13 million in profits, Rubin reports that the Bidens only chose to include $800,000 as subject to Social Security and Medicare tax under the reasonable compensation test, less than 6% of their profits.
To use Biden’s own term, that’s a load of malarkey.
Biden’s S-corp tax avoidance strategy minimizes the risk of an audit from the IRS, even though he wants more IRS audits for the rest of us. According to IRS data, the most common source of audits for high-income professionals like Biden is derived from examining sole proprietorships. The chances of an audit go way down if profits are instead run through an S-corp.
By choosing to use this business form, Biden has significantly diminished his chances of an IRS audit (at least before this week’s news cycle). Yet he wants to increase IRS funding so that many thousands more of his fellow Americans themselves get audited. The last Obama-Biden budget called for a $100 million increase in the IRS budget, in part for enforcement (read: audits).
If Biden is so fond of audits, why did he choose an audit-minimizing technique like the use of S-corporations?
In sum, Joe Biden wants to raise all of our taxes and hire a bunch of new IRS agents to audit us, but has no problem using a tax avoidance strategy he himself has called a “loophole” for “special interests.”
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