Q:

Hello, Mr. Kerstetter,
I came across your website today. I was wondering if you can answer me a quick question:
Our fiscal year is April 1^st to March 31^st. What would be the time frame that we can change to an S corp?
Appreciate your help!

A:

You need to do some more research and work directly with an experienced professional tax advisor before you take the step of converting to an S corp. 

As I have explained several times on both my blog and website, one of the biggest pitfalls to converting from a C corp to an S is the fact that you will also have to convert your fiscal year to a calendar year, which will force you to lose all of the benefits of having a different fiscal year. 

You may find that retaining your current C corp and starting a new S corp will give you the best of both worlds.  A good professional tax advisor should be able to explain how using two corps can work in your best interest.

I don’t know how much of my website you have looked at, but here are some key pages you should study before consulting with a professional tax advisor:

Comparing S and C corps
   <a href="http://taxguru.org/corps/scorp.htm&quot;

Benefits of Different Fiscal Years
   <a href="http://taxguru.org/corps/taxyear.htm&quot;

S Election Instructions From IRS 


Good luck.  I hope this helps.

Kerry Kerstetter

Q-1:

Subject: SUB S CORP SHARE VALUE

Dear Kerry;
I have spent an afternoon on the internet trying to get some general information about this subject, without success. Our family has a Sub S Corp trucking company which is now 5 years old and is doing quit well. Onginally we set my youngest son up as sole incorporator and he takes 100% of the Sub s schedule k-1 on his personal incme tax return. We would now like to sell some shares of stock (ownership) to my older son and daughter. How do we figure out the value per share to charge my older son. It is not so much to make money but what the accountant and the IRS will accept.
Thanks

A-1:

There are several different ways to value small businesses, each yielding very different results.

Rather than have a professional business appraiser give you all of those value, it is generally easier to decide, for your current needs, if you want a high or low value and then work with your professional tax advisor to draw up an analysis to justify that number.  That will be a lot quicker and a lot less expensive for your needs.

Everyone involved needs to sit down and look at the short and long term aspects to whatever value you use.  A high value will possibly generate a capital gain for your youngest son, depending on what his current adjusted cost basis is for the shares he will be selling.  That will also give the new shareholder a higher cost basis to start with.

Conversely, a low share price will generate less capital gain, or possibly a capital loss for your youngest son, but will give the new shareholder a lower cost basis to start with. 

Again, working with your professional tax advisor, you may want to start by calculating the break-even cost basis of your youngest son’s shares and then have your tax advisor back into a calculation method that would justify that value for the shares. 

Good luck.  I hope this gives you some ideas of issues to discuss among yourselves and with your professional tax advisor.

Kerry Kerstetter

Q-2:

Kerry:

Thank you for the response. I would like to pay you for some consulting time to explore this issue further.First of all there was a typo, in that our trucking company has been in existence for just over 11 years.  Second, the reason for the change in ownership is there is a pending divorce. He has a prenup dated 7/2/2000, excluding the companies value prior to that time.

Our present accountant is a family friend and we wish to keep him out of the loop at this time. From the information you gave us it appears that a low share price would be desirable, but would it stand the scrunity in the divorce court.  We intend to consult an attorney once we establish the price per share and the logic by which it is derived.  Could we pay you to help us arrive at a reasonable price per share, along with the reasons used to get there? Could we provide you with our financial figures to give you something tangible to work with? I further suspect that upon the share price determination that the company Articles of incorporation along with the stock retirement agreement would have to be amended.

Thanks

A-2:

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 all 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