(Adds Senate Finance Committee response starting in 10th paragraph.)
WASHINGTON -(Dow Jones)- Gabriel Durand-Hollis, owner of a San Antonio, Texas-based architecture and interior design firm, is no John Edwards. But he could nonetheless see his taxes rise as a result of a Senate measure that seeks to crack down on a technique Edwards, a former U.S. Senator from North Carolina, once used to avoid paying hundreds of thousands in payroll taxes.
The Senate provision, part of a broad bill that extends jobless benefits and renews expired tax cuts, would subject more of the profits of lawyers, accountants and other professionals to the 2.9% Medicare tax.
Durand-Hollis, one of two owners of a firm that employees 25, said the provision, if enacted, would boost his federal tax bill by $30,000 or more.
"If we had to send a big check like that to the IRS at the end of the year, we'd have to take a hard look at whether we can afford Christmas bonuses, or that new software purchase," Durand-Hollis said in an interview.
Criticism of the Senate tax provision comes as President Barack Obama Friday sought to highlight his support for measures aimed at helping pull small firms out of the economic recession.
"Small businesses will help lead this economic recovery. And that's why we will continue to stand by them," Obama said.
Some small business advocates say the Senate provision does the opposite, and they have enlisted a powerful ally to fight it--Sen. Olympia Snowe (R., Maine), considered a swing-vote on the broader tax package.
Snowe on Friday called the payroll tax provision a "poison pill in this tax bill, robbing American small businesses of the capital they need to create new, good-paying jobs."
Senate Democratic aides say the provision targets a loophole used to avoid payroll taxes, and they say they might make changes to ensure it captures the most blatant abuse.
"Closing this loophole promotes fairness in the tax code and is the right thing to do," said Erin Shields, a spokeswoman for Senate Finance Committee Chairman Max Baucus (D., Mont.). "The Finance Committee is working to ensure the provision is precisely targeted and does not hamper the growth of small business."
The measure attacks the tactic used by some s-corporation owners of paying themselves a nominal salary, while the rest of the firm's profits are collected through a dividend that isn't subject to payroll taxes.
Edwards drew criticism during the 2004 presidential campaign for his use of the tactic. He earned $26.9 million in four years in the late 1990s while reporting only $360,000 in salary.
Durand-Hollis declined to disclose his salary, but said it is commensurate with what other architects with his experience make. His firm had gross revenue last year of about $3.5 million.
There are about 4 million s-corporations in the U.S., not all of which would be subject to the new taxes. The taxes would apply only to certain professionals including doctors, lawyers, athletes, performing artists and investment advisers.
Dr. Joseph Smith, a Virginia podiatrist, said he could pay an additional $6,000 in payroll taxes as a result of the change. He paid himself a salary of $71,500 in 2009, and took an additional $48,500 as a dividend.
His accountant, Nick Potocska, said Smith's salary is not unusual since he works almost exclusively with Medicare patients, who pay less than patients covered by private insurance.
Critics of the Senate provision say it would treat all business profits the same as wages for services rendered, while failing to distinguish the return firm owners reap for investments of time and capital to grow their business.
"This bill blurs the line between a return on your capital and your risk, and wages. It's almost neutering the whole concept of capitalism," Potocska said.
The Senate proposal has its defenders. James B. Davis, who heads the tax practice at the Gunster law firm, said the provision targets an area that is rife with abuse and brings the tax treatment of s-corporations more in line with other types of business structures.
"All they're doing is putting s-corporations on a parallel with c-corps and partnerships. They are closing what would be easily construed as a loophole," Davis said.
Copyright 2009 Dow Jones Newswires
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