Tax Guru – Ker$tetter Letter

Q:

Hello…I recently file my articles of incorporation and EIN number. And I wanted to know if it was too late to change my tax year since I already filed a ss-4 and plan on becoming a S-Corp, I read your post on how to choose a tax year and wanted to take your advice and file my Taxes in June. I noticed they ask to pick you fiscal year on the 2553 document to become an S-Corp, could this be an opportunity to change it here.

Any advice or insight you have to give would be greatly appreciated. Also if your services are available for consulting in anyway I would also be interested in hearing about it as well.

Thanks

A:

You definitely need to start working with a professional tax advisor ASAP before you take one more step with your new corp; especially before filing the 2553. I have my doubts as to whether you have evaluated all aspects of your situation thoroughly enough to warrant the decision to choose an S corp as your most appropriate entity type.

Unfortunately, I am still not caught up enough with my current client load to be able to take on any new ones; so you should check with the names of other tax pros on my website.

While you referenced my article on choosing a corp tax year, you are missing some key points. The option to have the corp’s tax year end at a date different than December 31 only applies to C corps.  S corps are required to use a calendar year, ending December 31.  The only main exception to this is if the shareholders have a tax year other than 12/31, because the IRS’s goal is to match the S corp tax year to that of the shareholders.

As you may have seen in the instructions for the 2553, a different tax year can be chosen if there is a strong business purpose for that being the case.  Saving taxes, which is the main benefit of using a different tax year, is not an acceptable justification for IRS because, as you well know, their job is not to help anyone reduce their tax bills. Bottom line, it is for all intents and purposes an impossible task to convince IRS to allow a different tax year than 12/31 when the shareholders all have a calendar tax year for their 1040s.

So, if you are positive that an S corp is a good idea, there is no option with the tax year.  It must be December 31.

If you and your professional tax advisor conclude that a C corp would work out best for your situation, the tax year can end at the end of any month, regardless of what you entered on the SS-4.  As I have said many times on my blog and websites, until you file the first 1120, the C corp’s tax year is still subject to change.  Once the first 1120 has been filed with IRS, that officially locks in the tax year for that corp.

Good luck.  I hope this helps you understand the situation a little better and you see why proceeding any further without competent professional assistance is extremely dangerous.

Kerry Kerstetter