Tax Guru – Ker$tetter Letter

Q:

Subject: Timing Question

Hi Kerry- I am an attorney who, although not a trained accountant, does deal with accounting issues from time to time in my work.  My wife has a consulting business that she started with on a full time basis in January of 2006.  She generates about $100K in revenue, and all of this revenue is captured on a 1099-Misc.  Most of her business expenses are reimbursed by the main company for which she contracts.  The only real deductions we can take advantage of are a home office, her computer equipment, and her travel in our car.  In 2006, we paid taxes on all the revenue she generated on our jointly-filed income tax return.  This year, however, I am thinking of creating a corporation for the business, and possibly converting it to S status. If I do so, I have 2 questions:
 
1) If the corporation is created in October 2007, can the revenue that the business generated prior to the entity’s official creation be captured and reported on this year’s tax return?
 
2)  Is there any way that I can amend my 2006 tax filing by retroactively reporting the 2006 revenue as belonging to the corporation?
 
As the father of 2 young kids, I’m just now trying to work through these issues.  Thank you in advance for any assistance you can provide! 

A:

I can give quick answers as to what is possible and what’s not.

If you can get a corp up and running before the end of 2007, it is possible to shift some or all of the 2007 year to date profit over to that corp by paying it for business services that would be deductible on your wife’s 2007 Schedule C and reported  as income on the 1120.  There should be actual payments and you will need to make sure all future income is paid to the corp and the payer doesn’t report it under your wife’s SSN.  If too much income is accidentally reported under her SSN, there is a way to fix that on the Schedule C, which any experienced tax pro can handle for you.

This can’t be done for 2006 income for a couple of very basic reasons.   No payments to the corp were made during 2006 and the corp didn’t even exist in 2006.     

You really need to be working directly with a tax pro to help you and your wife set up whatever entity or entities would be most appropriate for your situation.

Good luck.

Kerry