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Here is the White House’s full statement to PolitiFact for a fact-check of a campaign ad from Sen. Rick Scott, R-Fla. The ad said President Joe Biden “cheated on taxes and got away with it” and “improperly used a loophole to dodge half a million dollars in taxes that should have gone to Medicare.”
“The President and First Lady fully and accurately reported their 2017 and 2018 taxes and the IRS never challenged those tax years.
“During the 2021 Presidential audit cycle (the examination of the 2021 return), the IRS did review the S corporation income, including whether the 3.8% Medicare tax should apply. And the IRS conclusively agreed it did not apply. Notably, this has nothing to do with the S corporation loophole. During the recent audit of the President and First Lady’s 2021 taxes, the IRS agreed that the President and First Lady’s royalty income would never be subject to the 3.8% Medicare tax, whether earned inside or outside of an S corporation, because an older federal regulation controls. Under Treas. Reg. § 1.469-2T, because the royalty income stems from the licensing of their own creative works, it’s always characterized as non-passive income derived in the ordinary course of a trade or business. That means it should never be subject to the 3.8% Medicare tax.
“The characterization of the royalty income is important because royalties represent the lion’s share of income in 2017 and 2018 and it represents all S corporation income during the presidency.
“The President and First Lady have correctly reported this income and the ‘S corporation loophole’ has never applied to them since they’re licensing their own creative works. Treas. Reg. § 1.469-2T controls here, the 3.8% Medicare tax does not apply, and this result is automatic. It is not elective – it’s just the way it is – and the IRS agrees with this.
“Note that the ‘S corporation loophole’ generally involves the application of the ‘material participation rules.’ The regulation cited above overrides the material participation rules. They do not apply here, and the IRS agrees.”