Narrowing Exceptions for Withholding Taxes Act of 2013

“(m) Special rules for professional service businesses

“(1) Shareholders providing services to disqualified S corporations

“(A) In general—In the case of any disqualified S corporation, each shareholder of such disqualified S corporation who provides substantial services with respect to the professional service business referred to in subparagraph (C) shall take into account such shareholder’s pro rata share of all items of income or loss described in section 1366 which are attributable to such business in determining the shareholder’s net earnings from self-employment.

“(B) Treatment of family members—Except as otherwise provided by the Secretary, the shareholder’s pro rata share of items referred to in subparagraph (A) shall be increased by the pro rata share of such items of each member of such shareholder’s family (within the meaning of section 318(a)(1)) who does not provide substantial services with respect to such professional service business.

“(C) Disqualified S corporation—For purposes of this subsection, the term disqualified S corporation means—

“(i) any S corporation which is a partner in a partnership which is engaged in a professional service business if substantially all of the activities of such S corporation are performed in connection with such partnership, and

“(ii) any other S corporation which is engaged in a professional service business if the principal asset of such business is the reputation and skill of 3 or fewer employees.

“(2) Partners—In the case of any partnership which is engaged in a professional service business, subsection (a)(13) shall not apply to any partner who provides substantial services with respect to such professional service business.

“(3) Professional service business—For purposes of this subsection, the term professional service business means any trade or business if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.

“(4) Regulations—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations which prevent the avoidance of the purposes of this subsection through tiered entities or otherwise.

“(5) Cross reference—For employment tax treatment of wages paid to shareholders of S corporations, see subtitle C.”

“(l) Special rules for professional service businesses

“(1) Shareholders providing services to disqualified S corporations

“(A) In general—In the case of any disqualified S corporation, each shareholder of such disqualified S corporation who provides substantial services with respect to the professional service business referred to in subparagraph (C) shall take into account such shareholder’s pro rata share of all items of income or loss described in section 1366 of the Internal Revenue Code of 1986 which are attributable to such business in determining the shareholder’s net earnings from self-employment.

“(B) Treatment of family members—Except as otherwise provided by the Secretary of the Treasury, the shareholder’s pro rata share of items referred to in subparagraph (A) shall be increased by the pro rata share of such items of each member of such shareholder’s family (within the meaning of section 318(a)(1) of the Internal Revenue Code of 1986) who does not provide substantial services with respect to such professional service business.

“(C) Disqualified S corporation—For purposes of this subsection, the term disqualified S corporation means—

“(i) any S corporation which is a partner in a partnership which is engaged in a professional service business if substantially all of the activities of such S corporation are performed in connection with such partnership, and

“(ii) any other S corporation which is engaged in a professional service business if the principal asset of such business is the reputation and skill of 3 or fewer employees.

“(2) Partners—In the case of any partnership which is engaged in a professional service business, subsection (a)(12) shall not apply to any partner who provides substantial services with respect to such professional service business.

“(3) Professional service business—For purposes of this subsection, the term professional service business means any trade or business if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.”