Corporations vs. LLCs

Types of Ownership Structures

Choosing the Best Ownership Structure for Your Business

Limited Liability Company FAQ

Q:

Greetings Mr. Kerstetter,

 

I just stumbled upon your site the other day.  Thank you for maintaining it, it’s a great resource.

 

I wanted to ask you about your article “Choosing A Fiscal Year“.  In it, you talk about the virtues of choosing a FYE other than 12/31.  You say “once the first 1120 has been filed with IRS, the fiscal year is set in stone.”

 

I was reading on another site about Form 1128 which seems to allow you to petition the IRS for a new FYE.  Can you comment on this?

 

Best,

A:

While you are correct that there is an official form to request a change in an entity’s tax year, the actual use of it is very discriminatory.  Because of the very well known tax savings opportunities in having a non 12/31 year end, IRS will almost always grant a request to change from a year ending in any other month to 12/31; but will almost never grant a request to change from 12/31 to the end of any other month.

I don’t have any official stats on percentages of which tax year changes are granted and denied; but my 32 years of experience in this area have given me complete confidence in my conclusions.  I would welcome any comments from any readers who have had a successful track record of obtaining IRS permission to change from 12/31 tax years  to other months.  I doubt any tax pro can cite such a record because of the well known IRS policy of doing what it can to force as many taxpayers into a calendar tax year as possible.

That is why it is so important to properly select the appropriate tax year with the very first 1120 filed. 

I hope this answers your question. 

Thanks for writing.

Kerry Kerstetter

Q:

Hi Kerry,

 

I’m confused.  My accountant advised me to form an S-corporation citing dividend payments would lower my taxes.  I’m confused about federal tax returns.  As an S-corporation I have to declare all earnings on my 1040 and won’t be able to deduct the corporation expenses?   The way I presently have it structured is I’m paying myself 60% of the corporations earnings, and an additional 40% as nontaxable dividends. 

 

If you have a moment would you please clarify.  Can I write off meals, uniforms, etc.  as a sole owner LLC electing s-corp tax filing statues?

 

Thank you,

A:

You need to be working with your accountant on this matter; not a stranger on the internet.

Your accountant should have explained all of the pros, cons and logistical details when s/he helped you come to the conclusion that an S corp was the proper format for your busyness.  S/he should then be available to help you handle the finances properly for your situation, as well as help you maintain the books and prepare the tax returns.

It sounds like either your accountant abandoned you or you chose the insane path of going it alone.  I’m not sure how you got the idea that business expenses are no longer deductible, but that is not the case, nor is it necessary to bleed out all of the profits from an S corp in the manner which you described.  You are operating under some seriously misguided concepts that no decent professional tax person could possibly have told you; so it appears that you are trying the extremely dangerous task of navigating the tax waters on your own.

You need to either reconnect with your previous accountant and get all of the logistical details worked out or find yourself a new one ASAP before you do any more damage.

Good luck.

Kerry Kerstetter