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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16576
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I have a client who formed an S corp late in 2015 to save SE

Customer Question

I have a client who formed an S corp late in 2015 to save SE tax money. And then it turned out they made very little money. The incorporation date was 1 Dec 15. They were solo propretors before that. They have a Lyft income and other SE Income. They elected to be treated as an S corp. They have one month as Scorp, and no real benefit. Can I simply post them as zero income as S corp and put their small income in Sole Proprietorship for all of 2015 and save a separate corporate filing. Or is that unwise. They made very little money. But I suppose I can do schedule C for 11 months and s corp for one month.
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

Thank you for your question. Anything received after December 1 must go through the S Corp. It's a pain, I know -- but they have to do this. They should have made the corp effective January 1 but you can't turn back time and change that. I wish I had better news, but don't cut corners -- do it right.

Please let me know if you need anything additional. If not, please rate positive.

Expert:  Lane replied 1 year ago.

I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial & tax advice since 1986.

I am a different expert and have a different answer.

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An S-Corp can voluntarily revoke it's S-Corp election.

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Pursuant to §1.1362-2 of the Income Tax Regulations, an election made under §1362(a) of the Internal Revenue Code is terminated if the corporation revokes the election for any taxable year of the corporation for which the election is effective, including the first taxable year.

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A revocation must be made with the consent of all shareholders holding more than one-half of the issued and outstanding stock of the corporation. In general, a revocation is prospective. However, a revocation made during the taxable year and before the 16th day of the third month of the taxable year is effective on the first day of the year and a revocation made after the 15th day of the third month of the taxable year is effective for the following taxable year.

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You need to get busy and get this postmarked or preferably sent via certified mail tomorrow morning

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Here's a sample letter: http://www.cpaatlaw.com/2013/07/sample-form-for-s-election-revocation.html

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Again, See this:

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Revocation - The election may be revoked if shareholders owning more than one-half of the corporation's stock (including nonvoting stock) consent to the revocation (§ 1362(d)(1)(A) & (B)).

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A revocation made by the 15th day of the third month of the corporation's tax year is retroactive to the first day of the tax year of revocation (§ 1362(d)(1)(C)(i) and Reg. § 1.1362-2(b)(2)).

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Let me know if you have questions.

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Lane

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Expert:  Lane replied 1 year ago.

P.S.

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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.

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I sincerely ***** ***** has helped!

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Please let me know if you have any questions at all.

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If this HAS helped, I'd really appreciate a positive rating (using that rating request or the stars on your screen)

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That's the only way I'll be credited for the work here.

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Thank you!

Lane

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Expert:  Megan C replied 1 year ago.

If you want to use the S Corp in 2016, it is unwise to revoke the election for one month -- and that can also be problematic. This is just a temporary inconvenience.

Please let me know if you need anything additional.

Expert:  Lane replied 1 year ago.

As it sound like you know here, the S-Corp may have been the wrong thing to do and it may be quite some time before it (if ever) becomes appropriate.

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The LLC is the fastest growing entity type in the nation for a reason - the low cost, simplicity and flexibility of a sole proprietorship, but with the liability protection of a corporation.

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Likely a better AND MUCH CHEAPER (in more ways than one) way to go.

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With the S-Corp, only once profits get WELL above that required reasonable salary (and the other expenses, so PROFIT) is there any SS & Medicare tax savings at all.

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Not only that, the S-Corp comes with much additional administrative overhead and risk (quarterly 941's, paying in both the shareholder employee and company match portion of SS & Medicare AT LEAST monthly, W-2''s, the additional risk that comes WITH those additional filing and pay-in requirements).

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Filing the voluntary revocation letter before the 15th is not cutting corners, it's good business AND tax planning.

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The assumption that you want to continue the S-Corp doesn't seem to line up with the information you've provided.

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And even if you think that may be desirable some day, doing so prematurely may leave the client exactly where he/she had ended up here again next yearf.

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In my 30+ years in practice I MUST tell you that TOO many times I see the S-Corp recommendation come from accountants who make their bread and butter DOING those payrolls ... unnecessary payrolls. (Not all of them, but far too many)

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Regardless, to answer your question, yes, you can still do this. I completely disagree both with the substance AND the inference made above.

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let me know how I can help.

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Lane

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Expert:  Megan C replied 1 year ago.

There are benefits to having an S Corp -- and since you have the LLC you have the flexibility of the legal structure. If you revoke, you're back to schedule C. It can actually be beneficial -- and yes, there are administrative headaches, but sometimes it's better to have a clear set separate business tax return. Your question was simply to ask if the one month should be claimed on Schedule C or not -- and that was answered. I'm sorry we veered off topic from your original question. Please let me know if I can be of any additional assistance.

Customer: replied 1 year ago.
Dear Megan, Thank you for your input. Yes, you did answer my question. The CLIENT wanted the S Corp and badly overestimated his 2015 income. Now, I plan on doing his 2015 corporate and personal return. We are talking around a thousand dollars in net corporate income in the last month and the year. I will file the ll20S. He and his wife are hiring a bookkeeper/payroll person to handle the new year. I presume no one in IRS is likely to care if I pay 1000 in dividends and no wages in 2015. This is just the last month we are talking about. The Client EXPECTS to make enough money in 2016 to make his S corp status worthwhile. I will not be doing the payroll and bookkeeping, and am only the tax guy for them. That being said, I want to make sure it is done right. It is a man and wife corp and they are the employees. Mainly sales related stuff. How rarely can they do payroll? Can they do it once per quarter. Or should I have them do it once per month. I won't be doing bookkeeping and payroll, but I want to advise them correctly in any event. I will simply do the 1040 with schedule C and 1120S for 2015 (last month) and next year the 1120s and `1040 with no schedule C. Is there anything else I should be alert to?
Expert:  Megan C replied 1 year ago.

Thank you for your follow up. They can reclassify draws as wages once per year, but I don't recommend it unless they are fairly liquid and able to pay tax -- you want to sort of "train" them to budget for taxes. Some clients are good, others are not good. If they are going to handle it themselves, I would almost tell them to do it monthly -- but that's just me being conservative --- there's no rule as long as they are being paid a fair market salary.

Sorry for any confusion -- the S Corp can be good, or bad, depending on the client -- there's a lot more to consider than just the tax cost, though.

Please let me know if you need anything additional. If not, please rate positive.

Customer: replied 1 year ago.
I am not worried about them spending all their money and not allocating for taxes. They are very conservative financially. If they make good money, which they expect to do, and which I thnk they will, it will not be a problem. They did not follow up with their bookkeeper payroll person, and so there was no wage formally done in December. They just took it all as they were used to as sole proprietors. They also have their own small home and Social Security so they are not hurting badly. They all did Lyfft tlas year, and made money doing that, but when you take out 57.5 cents per mile for 50,000 miles, you wind up with little taxable income and no need for corporate shielding of SE taxes. This year they are doing another business. Expect a 100kplus income. It is real they will make that or more, so Corp status does make sense. My question is allocating taxes between fair wage and dividend for 2015 and 2016. It is not exactly my problem, as I am not doing their payroll, but still it has a bearing on their taxes. Do I instruct their payroll person to start doing the split in 2015 or if it is so small is it even a problem?.Can I just pay it as dividend? It would not surprise me if we legiitiemately could come up with a loss for the corp for that month. Any dividend will be nominal. Now, for 2016, do I have to do a monthly payroll. Or can I let them do draw and classify at the end of each quarter wages and have the bookkeeper do quarterly filings. It is a husband and wife and I can tell them they have to leave tax money in the account, and I am pretty sure they are savvy enough to do so. If not, they could always borrow from Mom who bought them the house. I am not an experienced payroll person, and I want to make sure whoever they hire does good job for them, and does filing on time. But I also want to follow the law and minimize their expense. You are definitely getting a positive 5 star rarting. Please advise me on the easiest way to do this, and any pros and cons. I will then tell them what to advise their payroll person on and how often they must pay themselves a wage and when to file their quarterlies.
Expert:  Megan C replied 1 year ago.

You don't have to do a monthly payroll -- just make sure that they are paying themselves a "fair" salary. This is the crux of the S Corporation.

I would tell them to do it monthly, just to make it easy on the bookkeeper.

Please let me know if you need anything additional. If not, please rate positive.