Q:

Subject: Corporate tax question

 

Good evening, Mr. Kerstetter.

 

I just discovered your website this evening and am very impressed with the advice you give your readers.  You may not have time to respond to my email.  If this is the case, I certainly understand.

 

Here is my situation:  My husband and I have a C corp that was formed in 1999.  It’s a long story why we chose C vs S, but that’s history at this point.  What I am now wishing is that I had figured out in more recent years that we should elect S….

 

We are no longer doing business but the corp still exists.  In 2001 we created a line of credit account from shareholder to corp.  We have an agreement, set up at 8% interest rate, which was quite reasonable at the time, and kept running account of the transactions.  Payments were made to us, however they were somewhat sporadic instead of monthly.  The corp deducted the interest expense and we reported the interest income each year (until last year — I made need to amend that return at some point).  The line of credit balance is around $40K. 

 

Although this was our fulltime business at that time, we had a NOL each year, so we didn’t pay ourselves a salary and lived off of savings.  Of course, every eligible expense that could be run through the corporation was, but all the records were kept, etc.

 

So, now we are no longer doing business, have no profit coming in, but has NOL of $45K and line of credit owed to us of about the same.

 

How can we maximize our use of these losses but/during/after we dissolve the corporation?  Should we elect S status in 07 then close the corporation in the same year?

 

Thanks for reading this. 

 

Blessings,

A:

If you’ve read many of my blog posts, you should already know what I’m going to say regarding the foolishness of trying to handle corporate tax matters without the assistance of an experienced professional tax advisor.

There are a number of options for your situation that you will need to have a professional tax advisor analyze in the light of your past, current and future personal tax situation.

Converting the corp to S status won’t make the accumulated losses magically flow through to your 1040.  That’s not how it works  Only newly generated losses after the conversion will be able to pass through to your 1040.

Some of the options that you and your personal professional tax advisor will want to consider should include the following at a minimum.

Dissolve the corp and claim a capital loss for the amount of your unrecovered cost basis, which is normally going to be the amounts you invested in the capital stock and the principal balance of the corp loans that won’t be repaid.  This can actually be done most easily with a C corp.  Converting to an S and then dissolving it wouldn’t make any sense at all.

Keep the corp alive and start shifting some of your 1040 income over to it in order to soak up the NOL.  This is easiest to do if you have business schedules on your 1040, such as C, E or F, that can show deductions for business services.  Most experienced professional tax advisors should understand how to do this.

I didn’t notice your mentioning what state you are incorporated in.  Keeping a corp alive is more expensive in some states than it is in others.  For example, in California, you are required to pay in the $800 annual minimum tax plus the $25 annual report fee.  Here in Arkansas, there is only the $150 annual franchise tax with no income tax required if there wasn’t a net profit.  These costs could influence the decision as to whether it would make sense to hold onto the corp or just end it ASAP.

I hope these give you some points to consider as you work with your professional tax advisor to see what makes the most sense for your unique situation.

Good luck.

Kerry Kerstetter