Have a Tax Question? Ask a Tax Expert
Hi and welcome to Just Answer!In general - the corporation is a separate legal and taxing entity - separated from shareholders - and shareholder's responsibility is limited by the value of their shares in that corporation.When you file a final tax return - and it will have the tax liability and a negative balance - you need to provide a letter with explanation related to your situation.Generally - the corporation should file for the bankruptcy protection - but if there is no assets - that might be costly and not necessary.So - as a shareholder - you may not be held responsible for the corporate tax liability.However - as an officer and a person in charge - you are required to pay tax liability before any other debts. So - if the corporation earned any money - but funds were used for your personal purposes - you might be held responsible.In additional - to protect yourself - corporate transactions must be fully separated from your personal - thus - if any of your personal bills were paid out of the corporate bank account - that might be used against you.
So - your first step - to prepare and file final corporate tax returns - federal and state. Prepare balance sheet of the corporate which should support your statement that the corporation is insolvent.Prepare letters for federal and state taxing authorities with detailed explanation and that the corporation are not able to pay its tax liability.
The state liability is $9600 (7 years of FTB + penalty), the IRS is about 25k.
Can I file the returns and revive the corporation before taxes are paid ?
The corporation is my source of income at the moment.
The income stream is mainly consulting paid to the corporation and then to the other company - a sole prop. I can easily change the billing to the other company at which point the corporation has no revenue stream.
Again - as a shareholder - you are not responsible for the corporate tax liability.However - as an officer - you might be held responsible based on how corporate funds were used.You may receive income from the corporation in two ways:as a shareholder - via dividends; and as an employee - via wages.If you as a physical person was a contractor (self-employed) for the corporation - that might be viewed as hiding corporate funds - and you personally might be held responsible because there is no clear separation between corporate and your personal business and financial transactions. In this case - you might want to consult with a local CPA and try to minimize your personal liability.
Is it possible for us to complete the tax returns, pay SOME of the back taxes (or pay the FTB liability), file to revive the corporation and then file bankruptcy to discharge some of the tax liability ?
A separate sole prop. invoiced the corporation for expenses and consulting.
That is possible - but would be rather based on negotiation with taxing authority.Unfortunately I may not guarantee that your negotiation will be successful. But that is possible.The issue is that you was in two roles - a responsible officer of the corporation and a contractor providing services for the corporation - that would be OK if there is no tax liability. But since there is an outstanding tax liability - such scheme is viewed as a mix of corporate and personal financial transactions. Because there is no clear separation - taxing authorities will try to collect corporate tax liability from you personally.There are some options to limit your personal tax liability - for instance - if you can show that all funds went to pay business expenses. But even so - that might be a long and complex negotiation procedure - and it is advisable to have a local CPA representing you.