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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 1069
Experience:  Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
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I am currently working on my 2012 taxes to meet the Oct 15th

Customer Question

I am currently working on my 2012 taxes to meet the Oct 15th extension deadline. I created my real estate investment LLC in June 2012 and filed an IRS Form 2553 a month later to elect S corp status. I did this somewhat blindly with the help of a professional third party who specializes in helping establish new businesses and I really wasn't aware of my S corp status until recently. The S corp election was recommended by them to provide additional liability separation between my personal and corporate assets. My accountant, who I've used on my personal taxes for the last 10 years, was shocked to find out it is an S corp (vs sole proprietorship) and told me that it complicates my taxes immensely. My LLC is in startup mode, so I had a lot of expenses last year but zero income. I am the sole member of the LLC and was paid no salary. I've read online that an S corp who doesn't pay it's officers a "reasonable salary" will come under scrutiny from the IRS. I understand that as an S corp, i must file an 1120S. I recently spoke to an accountant at the company who helped me establish my LLC and he said I could just file a "zero return" on the 1120S and that it's not that much extra paperwork.

My question is this: Is it better/easier to rescind the S corp status (can I and how would I do that?) or just file as as an S corp? Also, how do I address all of my expenses for the LLC?
Submitted: 1 year ago.
Category: Tax
Expert:  Barbara replied 1 year ago.

Welcome. My name is XXXXX XXXXX it will be my pleasure to assist you with your tax question today.

 

An LLC is a disregarded entity for tax purposes. Thus, the reason for electing sole proprietorship, C corporation or S corporation status. Since you have elected S corporation status for 2012, my opinion is to follow the advice of the accountant you spoke to and file the 1120S for 2012.

 

As to 2013, you will want to file Form 8832 (Entity Classification Election) to elect sole proprietorship status but it cannot take effect more than 75 days prior to the date the election is filed and it cannot take effect later than 12 months after the date the election is filed. However, you may be eligible for late election relief in certain circumstances.

 

The following is the link to Form 8832 and its instructions:

 

http://www.irs.gov/pub/irs-pdf/f8832.pdf

 

My suggestion would be to include a letter with Form 8832 explaining that you made a mistake in electing S corporation status, and that you have filed your 2012 1120S.

 

As to the "reasonable salary," I would not worry about it in your situation.

 

As to the expenses, the following article contains excellent information regarding startup expenses:

 

http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/start-up-costs-and-organizational-expenses.aspx

 

Please let me know if you require further information or clarification. I will be offline for a while, but if you have follow-up questions, I will address them when I am back online. This will allow you time for review the links I have provided.

 

Thank you and best regards,

Barb

 

 

Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 1069
Experience: Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
Barbara and other Tax Specialists are ready to help you
Expert:  Barbara replied 1 year ago.

Hi, John.

 

Just a short note to thank you for the "excellent" rating and very generous bonus. Both are most appreciated. If you have any questions in the future, please feel free to put "for bkb1956 or Barb" in the subject line, and I will be happy to assist you. Recommendations to family, friends and colleagues are also always appreciated.

 

Thanks again and best regards,

Barb

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