HOW TO INCORPORATE

Fancy-Sounding Tax Hurts S Corps.

Millionaires beware!
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A new type of tax promoted as a levy on movie stars, rappers, and the Thurston Howells of the world is costing thousands of entrepreneurs a pretty penny. The so-called millionaire's tax, which California most recently adopted, "is a bad omen for small businesses everywhere," says Bill Ahern, of the Tax Foundation, a conservative think tank based in Washington, D.C.

In New Jersey, roughly 28,000 of the state's high-income residents now pay an extra 2.6% on every dollar they earn over $500,000 annually. Former governor James McGreevey championed the tax as a way to refund property taxes to the state's middle-class homeowners. In similar fashion, California voters passed a ballot proposition in November that tacks an extra 1% tax on every dollar that individuals make over a million, to help fund the state's mental health services. New York, Vermont, and Ohio also have specific taxes for high-wage earners.

The problem for S corporation owners and LLC partners is that although they record the profits from their business on their personal returns, most of that profit is on paper only, as the bulk gets plowed back into buying inventory and making capital improvements. "It hurts us to find the additional cash to pay the tax," says A. Michael Candido, president of J. Moore & Co., a mechanical contracting company based in Livingston, N.J. Candido's firm generates about $20 million in revenue a year, which means the tax will probably cost the company an additional $30,000 a year -- money Candido says could have been used to hire office help, to upgrade the firm's computers, or to pay health care premiums, which jumped, coincidentally, by the same amount.

Selected Millionaires Estimated Additional Tax
Name: Bruce Springsteen
Occupation: The Boss
Residence: Freehold, N.J.
Estimated Income: $64 million
$1.7 million
Name: Sean Combs
Occupation: Rap mogul
Residence: Alpine, N.J.
Estimated Income: $50 million
$1.3 million
Name: Angelina Jolie
Occupation: Actress
Residence: Los Angeles
Estimated Income: $27 million
$260,000
Name: LaDainian Tomlinson
Occupation: Running back
Residence: San Diego
Estimated Income: $6.5 million
$55,000
Name: A. Michael Candido
Occupation: Business owner
Residence: Livingston, N.J.
Company Revenue: $20 million
$30,000
Last updated: Jan 1, 2005

DARREN DAHL

Darren Dahl is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.




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