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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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In a nutshell, my question is, how does one deal with the tax

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In a nutshell, my question is, how does one deal with the tax issues involving switching from single-member LLC to s-corp during mid-year? Here’s more detail. Last year I converted my business from an LLC to an S-corp. The incorporation date with my (Virginia) state corporation commission was April 23, 2009. I indicated this date in form 2553, but recently, having spoken with an IRS agent, I understand that I could have indicated January 1, 2009. They said I may be allowed to treat my company as an S corp retroactive to January 1, 2009 if I send a letter to them requesting that change, which is what I did about three weeks ago. I’m still waiting for the approval. (I previously was under the impression that I would have to file a Schedule C for January 1 through April 23 and an 1120S for the remainder of the year, but realized that this would be quite complicated.) So prior to April 23 I paid myself via direct profits, and after April 23 via W-2 wages. My question is, assuming I get the
Submitted: 4 years ago.
Category: Tax
Expert:  Merlo replied 4 years ago.

Hello rick,

 

Your question did not seem to post completely. It cut off after "my question is, assuming I get the ......"

 

Could you please provide more detail on what you need to know.

 

 

Customer: replied 4 years ago.
Oh -- right. Here it is:

My question is, assuming I get the IRS approval, how will those pre-April 23 profits be treated/taxed? As dividends to me, in which case I assume they’ll be exempt from FICA? Or should I be on the safe side and pay FICA tax on them? But if I did the latter, wouldn’t I have to file a Schedule C? And if I filed a Schedule C, wouldn’t those pre-April 23 revenues not be counted when determining the profit for the s-corp?

Note that I plan to use TurboTax Business to do my s-corp taxes.

Expert:  Merlo replied 4 years ago.

Hello rick,

 

If you get the approval from the IRS, which you will likely receive, then you will treat the entire year as S Corp status. The withdrawals that you took earlier in the year from the profits can simply be declared as dividends, and you are correct that FICA taxes will not be paid on those amounts. You may have additional dividends from later in the year as well depending on how much profit your business had.

 

With S Corp status, all the IRS requires is that you pay yourself a reasonable salary. Obviously the reason for this is to discourage S Corp shareholders from simply declaring all profits as dividends, thereby avoiding FICA taxes on the entire profits that were earned. But you have indicated that you did start paying yourself a salary in April, so this should not be an issue for you.

 

 

Thank you rick

 

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thanks - that's helpful. My only concern was that the dividends would be about $6K whereas the salary about $22K (which was way lower than my target of $40K for the year, which I wouldn't have been able to meet even if I started W-2 from Jan. 1). Just hoping that the IRS won't insist that the salary is too low and insist that I pay FICA on the $6K.
Expert:  Merlo replied 4 years ago.

Hello rick,

 

There is no way for any of us to know what parameters the IRS uses when judging what they deem to be a reasonable salary. However, I think that a large part of their decision is based on the percentage of what that salary is of the total profits.

 

From the figures your provided, I am assuming your total profit for the year was $28,000 of which you paid yourself a salary of $22,000, or 78.5%. In my opinion anything over 60% of your profits paid as salary is going to be safe. You cannot pay yourself more than what you have in profits, and as long as your percentage of salary is 60% or more, this is not likely to be questioned.

 

 

Thank you rick

 

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and other Tax Specialists are ready to help you

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