WASHINGTON-Representative Scott McInnis (R-Colo.) recently introduced the Small Business and Financial Institutions Tax Relief Act of 2003 (H.R. 714), which expands the number and type of shareholders for banks and companies electing Subchapter S corporation status. McInnis’ bill increases the number of shareholders for Subchapter S corporations from 75 to 150; allows Sub S shares to be held in Individual Retirement Accounts; clarifies that interest on bank investments held for liquidity and safety and soundness is not considered restricted passive income, and permits S corporations to issue preferred stock. According to the Independent Community Bankers of America, if the bill passes into law, more than 2,000 existing community banks would be eligible to convert to Subchapter S status. “Subchapter S corporation status is a well-established and simple method to prevent punitive double taxation by paying the income tax only at the shareholder level,” ICBA Chief Economist and Director of Federal Tax Policy Paul Merski explained. Currently, the top tax rate for Subchapter C corporations is 35% taken when the income is earned. Then the shareholders pay a top tax rate of 38.6% on top of that. Additionally, Merski pointed out that the estate tax, as high as 55%, can be heaped on top of that.

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