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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3987
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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ii am a contractor, i have a corporation and file 1120s for

Resolved Question:

ii am a contractor, i have a corporation and file 1120s for my corporation the earnings after i pay emplyees and expenses is my income but the 1120 reports it on a k-1
and that disqualifies me for my earned income credit. my earnings are between 25,000 and 28,000 every year and i have two dependents. how can i file my taxes and qualify for my credit?
thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi Juan - Is it the investment income limit that disqualifies you? (the dividend portion of your income, that's not salary). I'm guessing that's it

NPVAdvisor :

If that's the case, then you may want to revoke the S-corp status and simply have self employment income (which is not considered investment income)

NPVAdvisor :

here's an excellent article on Chron.com about the steps needed to revoke S-Corp status and return to LLC ... which would simply general self employment income, rather than investment (dividend, k-1) income

NPVAdvisor :

Step 1

Vote to terminate the S corporation election. Call a meeting of all of the owners, known as members, of the LLC. Subchapter S of the Internal Revenue Code requires the consent of over 50 percent of the company's owners to terminate an election. Record the vote in the minutes of the meeting and file the minutes in the LLC's records book. Have the secretary draft a resolution empowering a managing member to carry out the decision to terminate.



Step 2

Prepare a statement of consent to terminate the election. Have the majority of owners who voted for the termination sign the consent form. The format of the consent form can mirror the consent statements that were included with the original S corporation election on IRS Form 2553, Election by a Small Business Corporation. Basically, the consent form should contain language that expresses the desire to terminate, the effective date of the termination, a list of the owners who consented, their Social Security numbers and their percentage ownership interest that proves a majority decision. The form must be signed by the owners, and their signatures must be notarized.



Step 3

Prepare a letter to the IRS, terminating the election. There is no official form to terminate an S corporation election. The letter should be titled' "Revocation of S Corporation Status" and include a statement that the company is terminating the election pursuant to IRC Section 1362(a). It should also include the company's Employer Identification Number and the effective date of the termination. The managing member who signs the company's federal income tax return should be the one who signs this letter.



Step 4

Send the termination letter and the statement of consent to the IRS. Send the documents to the same IRS service center that processed the original election. Refer to the letter the company received from the IRS, authorizing the election, when you filed Form 2553. This letter should be in your company's records book. Address the termination letter to the same service center.


 




NPVAdvisor :

So, after deducting salaries and other expenses on your Schedule C (which is the form you would use to file taxes as a single member LLC) you would be left with a self employment income well under the limit for the earned income credit. and NO dividend ("investment") income which I think is the problem here.

NPVAdvisor :

Let me know if I've understood your questions correctly, or if you have other questions

NPVAdvisor :

Lane

Expert:  Lane replied 1 year ago.
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Expert:  Lane replied 1 year ago.

Hi,

... just checking back in, as I never saw you come into the chat.

Again, as an LLC, you would still have the liability protection of a corporation, but not have that "investment" income that's keeping you from qualifying for the EIC.

Let me know of you have questions.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3987
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

there are no members i am the only one.


 

Expert:  Lane replied 1 year ago.

The that's what I would recommend.

Sometimes he S-corp can be better for raising capital from new shareholders ... or save a little bit on self employment taxes by having some of what comes to you be distribution of profits on a K-1, over and above a salary.

But in your case it's that small investment income limit that's hurting you I believe.

See this (and note the last line) from IRS:

Like Share Print
Preview of 2013 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates

Here is a preview of the 2013 tax year income limits, maximum EITC amount and the EITC-related tax law changes.

Preview of 2013 Tax Year

Earned Income and adjusted gross income (AGI) must each be less than:
$46,227 ($51,567 married filing jointly) with three or more qualifying children

$43,038 ($48,378 married filing jointly) with two qualifying children
$37,870 ($43,210 married filing jointly) with one qualifying child
$14,340 ($19,680 married filing jointly) with no qualifying children

Tax Year 2013 maximum credit:
$6,044 with three or more qualifying children
$5,372 with two qualifying children
$3,250 with one qualifying child
$487 with no qualifying children

Investment income must be $3,300 or less for the year.


Another thought would be to pay yourself all in salary and take no (dividend from the k-1)

Customer: replied 1 year ago.


but if i give my self a 1099 then it records double one from the co n another from myself to myself

Expert:  Lane replied 1 year ago.

No, you'll need to actually go through the steps above to terminate the S-corp election.

The you'll file as an LLC with only self employment income.

I'm guessing that's where you started ... as an LLC and the did the S-corp election.

Once you revoke the S-corp election, you'll only have that self employment income from the LLC and that's it

Customer: replied 1 year ago.


oh ok so i must terminate the s-corp and then report on the 1140 with schedule c


 

Expert:  Lane replied 1 year ago.

You have it.

Again, for your purposes, I would think the LLC is better anyway.

LLC is kind of a hybrid (fastest growing entity in the country), that still protects your personal assets from creditors and lawsuits... but has the flexibility of a sole proprietorship.

I think folks go to the S-corp too quickly anyway.

But yes, at the income level you're at now, the LLC makes more sense because of the saving that come from the EIC.

AND... you can always elect S-corp at a future date.

Lane
Customer: replied 1 year ago.


ok i got it thank you for the help. is there anything else i need to do here before terminating this session?

Expert:  Lane replied 1 year ago.


No, you already rated ... and thanks so much for that.

Let me know if I can help further.

If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.

Thanks again,
Lane

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