Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for August 31st, 2009

Reporting S Corp Activity

Posted by taxguru on August 31, 2009

Q:
Subject: 1040/ S corp question
I saw your website and think it is great… but I have one question.
I have a 1-person Massachusetts S corp (I own all shares and there are no other employees) and have filed a separate return for it in past years.
Question: Can I include this S corp on my personal return, or do I have to file it separately?
Thank you!
A:

If I understand your question correctly, you want to skip filing an 1120S for your corp and just report all of its activity directly on your 1040.

If that’s your inquiry, this is another perfect example of the pitfalls of trying to set up and operate a corp without the assistance of professional advisors.

A corp is required to file its own income tax return; so you may not skip the 1120S and just include its activity directly on your 1040. You must file an 1120S and then include the K-1 info on your 1040.

Some pre-planning with an experienced professional tax advisor could have saved you a lot of hassles.

If you had wanted to avoid having to file another income tax return, you could have set up a single member LLC instead of an S corp. That would enable you to report all of your business activity on a Schedule C with your 1040.

However, that could very well be more expensive for you because the net income from the Schedule C would have been subject to the 15.3 self employment tax. Net K-1 income from an S corp is not subject to the SE tax.

Depending on the size of your profits, the cost of having to prepare another income tax return could be a tiny fraction of the SE tax you are saving.

I don’t mean to insult you here, but it is clear that you are out of your depth in attempting to properly handle the tax matters for your S corp. Whether you have been preparing the K-1s properly, especially in regard to items that are required to be reported separately, is extremely doubtful. You need to start working with a professional tax advisor ASAP to clean up your past mistakes and ensure that you don’t make any more.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thanks for your feedback. I appreciate your thoughts and information.



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