Q:

Subject: S Corp. question

Hello:

I know you are not in California.  However, I was wondering if you could shed some light on a question.

I am an independent contractor (personal trainer), I have been filing a schedule C and paying city tax as well for the last 8 years.  I have grown my clientel where I personally earn +$150,000.  I think if I form an S Corp. I may be able to limit some of my tax liability.  For example, if I draw a $60,000 income, I can same on SS Tax, be only taxed (income wise) on the $60,000 and only pay a corporate profit tax on the remaining $90,000.

 

Does that seem correct to you?

 

I am just worried that the IRS will come back and say, “Hey, last year you made +$150,000 and now you’re claiming $60,000.  Where’s the rest?”  And I am afraid they won’t see the extra $90,000 as profit.

 

Any thoughts would be greatly appreciated.

 

Thanks,

A:

As long as you handle and report the corp and personal income and expenses properly, IRS shouldn’t have any problem with the fact that your business has gone through the normal transition from a Schedule C sole proprietorship to a corp.  I have worked with thousands of such businesses and I can’t recall one incident where IRS audited a tax return just because the taxpayer moved his/her business to a corp entity.  While there are obviously huge tax savings opportunities by using a corp, there are also other important reasons to do so, so IRS doesn’t automatically suspect a business owner of anything wrong just because s/he chooses to make that change.

Generally, in the first year or two, there is some overlap with ID numbers used on 1099s and other documents that could cause an IRS matching problem.  An experienced tax professional will know how to report these items in such a way as to avoid any actual problem with IRS and/or the State tax agency.

In regard to what particular steps you should be taking, there are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country. 

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you. 

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

Q:

Subject: Fiscal Year on your website

 

Hi Kerry,

 

I am starting a new LLC and C-Corp to move money back and forth based on this fiscal year principle, however, after reading on your website, I’m not sure I understand your comments “Toward the end of your personal fiscal year (12/31), you bleed off some of your taxable income to your C corp by paying it for something like rent or marketing services.”  I was not aware rent or marketing services is tax deductible on a personal level, correct?  I understand how you can do such a thing between entities, but not between entity and personal.  Could you please explain further?  Thanks.

A:

The payments from your personal funds do need to be deductible in order to make the income shifting plan work.  They should be deducted on whichever schedules apply to the kinds of income you have, such as C, E (Page 1 or Page 2) or F.  If all of your income is from W-2 sources, these payments can be deducted as unreimbursed employee expenses on Schedule A.

Do not try this on your own.  Any properly experienced professional tax advisor should be able to help you set this kind of thing up to work most efficiently for your particular circumstances. 

Good luck.

Kerry Kerstetter

Q:

Subject: quick S Corp question

Want to revoke S Status for corp. Never filed a corp return. Am three years behind in filing. Want to file as C with fiscal year ending in March 31. Is this possible. I believe we filed 2553 in 2004.

Tku

A:

It won’t be as easy as you think for various reasons dealing with both IRS and your state tax agency. 

You need to work with an experienced tax pro to work out the best method to resolve this matter.

Some possible issues you will encounter:

IRS and the State will probably refuse to accept the revocation until you file all of the past due 1120S returns.  Even with no activity, you have to let IRS and the State know that.  You didn’t say what state you’re in; but if you are in one with a minimum annual tax, such as California’s $800 per year, you are looking at some large past due amounts, including penalties and interest.

Since an S corp is required to have a tax year ending on December 31, you will need to formally request a change.  As I’ve mentioned several times before, IRS is not friendly to the concept of non-December tax years; so they are not very likely to honor your request.  Also as I’ve said on countless occasions, it may very well be much easier to set up a brand new C corp, where the fiscal year is completely open, than to try to adjust what you already have.

Again, an experienced tax pro should be able to help you straighten these issues out.

Good luck.

Kerry Kerstetter