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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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We have incorporated an Arizona LLC under C-Corp and elected

Customer Question

We have incorporated an Arizona LLC under C-Corp and elected it as S-Corp effective from Jan 1, 2011. But we came to know that NOL from c-corp can't be applied to S-Corp. But the NOL is huge and IRS said we have to request for Private Letter ruling and which may cost upto $10K and the output may not be favorable to us.
Sincerely XXXXX XXXXX help with this crisis.
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.

Randalltax :

Hello and thanks for asking today.

Randalltax :

Yes, the NOL would be locked up in the C-Corp and cannot be passed to an S-Corp because an S-Corp is a pass-through entity. The NOL must stay at the entity level.

Randalltax :

Essentially the only relief that I can think of is to revert back to a C-Corporation. I would have to do some research to see if the NOL survived the transition to S-Corp such that it still exists after such re-conversion to C-Corp.

Randalltax :

In any case, there is a limit of switching back and forth between S and C status as well that you need to be aware of.

Randalltax :

And I think it accurate that the IRS told you that success in a PLR is minimal, at best. You would have to have some reason to sustain the NOL in switching over, and the law is quite clear that it is prohibited.

Randalltax :

You may have jumped off the cliff (switching to S-status) and once you go over, it is too late. But I will research and get back to you.

Randalltax :

therapy

Randalltax :

sorry about that...

Randalltax :

I do know that you can revoke S-status by simply writing a letter to the IRS. However, under normal circumstances, this election, if made today, would apply to 2013 and beyond. It would not affect 2011 or 2012.

Randalltax :

According to a letter I just reviewed with the IRS, it is not possible to revoke an S-election retroactively for 2011 or 2012, so that option is off the table.

Randalltax :

It would appear from my readings that the C-Corp just hangs on to the NOL. If the S-Corp converts back to C-status, the NOL can be used again.

Randalltax :

Any particular reason you elected S-Corp? Obviously it wasn't for the tax advantage.

Customer :

Hi, Thank you for the response

Customer :

Yes,we wanted to revoke S-corp to take advantage of NOL

Customer :

we earned an income of total 100K for 2011 & 2012 for which we have to pay taxes and if it is C-Corp NOL will eliminate these taxes

Randalltax :

Yes. You will be stuck for 2011 and 2012,

Randalltax :

But also keep in mind that any money you take out of the C-Corp will be taxed to you. Which may be why your switched.

Randalltax :

For example, if the company has a $100K profit BEFORE paying you and you pay yourself the $100K in salary and bonus, then the corporation has a net income of zero, and the NOL has no purpose.

Randalltax :

Unlike an S-Corp there are no "distributions" that are not salary or bonus.

Randalltax :

A C-Corp can pay out a dividend, but that's only AFTER corp level taxes are computed, and the dividend is still taxable to you.

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