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Archive for the ‘corp’ Category

Corp tax rates by State

Posted by taxguru on February 7, 2016

Tax Foundation has an interesting look at the different tax rates that the various states levy on corporations

State Corporate Income Tax Rates and Brackets for 2016 

It has long been a common tax savings technique to shift income from high tax states to those with low or zero State income tax rates.  When we were in California, we helped clients shift a lot of income from that state’s high rate corp tax to zero tax states, such as Washington and Nevada.

There are a number of requirements to do this legally and avoid problems with the high tax state agencies who obviously don’t like this strategy; so anyone considering doing this should work with an experienced professional tax advisor and not try this technique on their own.  

Posted in corp, StateTaxes | Comments Off on Corp tax rates by State

S Corps are not a DIY project

Posted by taxguru on March 5, 2014

A very common and costly mistake is when people hear something about a tax strategy and then think they can set everything up on their own, without the services of a professional advisor.  This is a perfect example of the “penny wise pound foolish” adage.  Over the past few weeks, I had some interesting email exchanges with readers who found themselves in the deep water after setting up S corps on their own.  Here is one of them.

 

From a Reader:

Subject: S-Corp question

Hi Kerry,

 

I wondered if you could kindly answer a question for me. I’ve tried and tried to find the answer online to my exact situation, but I still feel confused.I am self-employed and I run a small business from home for 3+ years now. During the year I make quarterly payments on my federal taxes with vouchers. Then I simply file a 1040 under my name and SS number, and include the name of my business on my schedule c. Real simple.  

 

Well last year I stupidly got talked into becoming an S-corp (which isn’t even necessary for my small biz) and I got the approved S-corp election in the mail. It says it went into effect starting in May 2013. I never did anything with it and now want to just continue to file my usual 1040 and schedule c (sole proprietorship). I am the only owner of the business. I have no employees etc.. what do I do with this open S-corp status which I have never used or filed under? Also, as additional information, I did make my usual quarterly payments during 2013. I just need to know how to file as usual come April without going the S-corp route? How do I get rid of this S-corp status?

 

Thank you in advance,

 

My reply:

Before I can advise, I need some more info.

In order to file for an S election with IRS, you must have set up a new corporation or LLC.  A Schedule C isn’t eligible for the S election.

Please tell me what entity you filed the S election for and in what State.

Kerry Kerstetter

 

Reader:

Hi Kerry,

It was my already existing business which is a title searching company. As far as the schedule C is concerned I meant that this is a schedule I have been using each year along with my 1040, because I was just filing personal taxes. 
The s-corp was approved in may 2013 but I have never filed any returns as an SCorp, nor do I want to. I want to just terminate the SCorp status and continue to file as I have been all these years, as sole proprietorship under my ss#.
Thanks,

Oh and Florida is the state

 

KMK:

If I understand you correctly, you filed the S election (Form 2553) for your sole proprietorship (Schedule C) business.  That is not legally allowed and was an improper filing. The S election is only to be used for corporations or LLCs.

I am trying to figure out why you did that.  You may have mistakenly assumed that you were forming a new corporations by filing the 2553 with the IRS.  That is not how corporations are established.  Every corporation is chartered by the state in which it is to be headquartered, such as Florida in your case, by the Secretary of State’s office.  After the corp is born (chartered), an election can then be made with IRS to be taxed as an S corp.  This can only be done with existing corporations.  IRS has never chartered or established new corporations

Since the 2553 filing was improper (illegal), the S election was as well.  You shouldn’t have to do anything formally to revoke an election that wasn’t legal to start with.  If IRS does send a letter asking where your 1120S is, write back and explain your mistake in improperly filing the 2553.

This is a perfect illustration of why it is so dangerous for small business owners to try to handle tax matters on their own.  You should be working with an experienced professional tax advisor before doing anything that would affect your taxes, such as changing the tax entity.  Any tax pro would have told you that an S election isn’t legally possible for a sole proprietorship.

Good luck.  I hope this info helps.

Kerry

 

Reader:

Kerry,

Well I went from a DBA to an LLC to an SCorp. The LLC and SCorp transition took place at the same time. I did it on line.
I made the transition because I was told by my tax person
At that time that I could save money if I became an SCorp.
I have not yet filed taxes as an SCorp and I don’t want to. I’m simply
Trying to find out if I can cancel the whole LLC-SCorp and file as a DBA for 2013 , like I have been all these years. 
I don’t know how else to word my question. I made a mistake. I should not have done the SCorp route…
Thank you,

 

KMK:

Thanks for the additional info.  What I am going to say is based on the info you have provided and should be verified by a professional tax advisor who can look at the actual paperwork you have regarding the LLC and S-Corp with both IRS and the State of Florida.  There may be another wrinkle to this that you don’t see.

If the paperwork checks out, it looks like you can probably just ignore the S election with IRS and continue to file your business activity on Schedule C with your 1040.  IRS may send you a letter asking where your 1120S is for the S corp.  You can simply respond that the election was done in error.

If your business is profitable, IRS has no motivation to force you to use the 1120S because the Schedule C almost certainly results in more tax revenue for them, especially considering the SE tax that would be avoided with an S corp.

You also need to check with the Florida Dept of State regarding officially dissolving the corp so that they don’t come after you later on for unpaid annual report fees and penalties.  You can do this online at their website:
https://efile.sunbiz.org/dissolve01.html

I hope this helps.  Again, you should start working with a professional tax advisor ASAP who can assist you in a more timely manner in matters such as this.

Good luck.

Kerry

 

Final from Reader:

Kerry,

Thank you so much for your help. I was also doing some research and pretty much came to the same conclusion. And yes Realize I have to dissolve the corp with the Florida dept of state and started researching this too. Thank you for the link you sent below. 
Again I appreciate your time and your excellent suggestions!
Best,

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in corp | Comments Off on S Corps are not a DIY project

Corporate Minutes Scam in the mail

Posted by taxguru on November 3, 2013

While I know that this scam has been aimed at Arkansas corporations, I am guessing that the scammers will also be doing the same phishing for suckers in other states.  In true scammer fashion, their website is as bland and nondescript as one can be, with no trace of the identities of the crooks behind it.  

 

From a Client:

Subject:  Annual Minutes Requirement Statement

Kerry ,

 
We received this letter yesterday and not quite sure if it needs to be addressed by us or not since we closed out the Corp. thought I let you look at it first . Please let me know what you think if this is something new for the Corp .
 
Thank You

 

My Reply:

That’s a complete scam that you can ignore.

Actually, I received two of those in the snail mail yesterday; one addressed to each of our corporations.

It looks like those scammers calling themselves Compliance Services got the list of all Arkansas corporations and sent them all those letters for their bogus “service.”  At $125 a pop, if they can get a few hundred suckers to fall for it, they will make some good money.

 

 

Posted in corp, scams | Comments Off on Corporate Minutes Scam in the mail

Comparing Health Benefits By Entity Type

Posted by taxguru on December 28, 2012

These comparison charts from the Federal Tax Update webinar I attended last week are quite handy.  They illustrate one of the big differences in tax free owner benefits between S and C corps that I have long been discussing and why at least one C corp is almost always a must have.

 

 

 

From Tax Info

 

 

Posted in corp, Deductions | Comments Off on Comparing Health Benefits By Entity Type

Formally dissolving a business

Posted by taxguru on August 8, 2012

From Blog Pix

A huge expensive mistake people often make is assuming they can just close up their corporation’s bank account, walk away and that’s the end of it.  That’s not enough to satisfy the authorities, especially in the PRC. 

Until all of the proper official forms are filed and accepted by the Secretary of State’s office, that entity is technically still alive and has to pay all of the related taxes, including California’s $800 per year minimum tax.  Penalties and interest make that balance grow quite quickly.

Even if you’ve left the original state, that’s no security against being pursued for the delinquent taxes and penalties.  I have seen plenty of cases where fellow California refugees have been hounded by the FTB in other states, including here in the Ozarks.  The FTB aggressively pursues taxes all over the world.

I mention this because there is a good article in the FTB’s latest issue of TaxNews on how to properly wrap up a defunct business:

A Guide to Formally Terminate a Business Entity’s Legal Existence

This article from the previous month’s TaxNews is also very illustrative of the large amounts of money at stake for not properly dissolving a business entity.

Suspended/Forfeited Business Entities Revivors

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in Calif, corp | Comments Off on Formally dissolving a business

Allowable S Corp Tax Years

Posted by taxguru on July 26, 2012

Q:

Subject: S Corporation

Hello, I was doing some research on S corporations and came across your website through a Google search. You noted several times that a disadvantage of electing S corp status is that you must use a calendar year-end. Can you please provide a reference citing this requirement? IRS Form 2553 specifically allows the corporation to select a tax year, whether it be calendar year or fiscal year, so I’m curious to see what you are referencing.

Regards,

 

A:

Until the mid-1980s, an S corp was allowed to have a fiscal year ending at the end of any month, just as with C corps.  Then there was a new law or regulation passed that required all S corps to switch to a December 31 tax year.  I can remember having to do a lot of short year 1120S returns to make this transition for clients’ S corps.

Basically, the reason for the requirement was to keep the S corp tax year in sync with the tax year of its owners.  If a majority of the owners have a different tax year, that is justification for using a similar tax year for their S corp. Since almost all individuals have a calendar tax year, S corps they own are required to use that same tax year.

Here is The Code section dealing with this:

§ 1378(a) General rule
For purposes of this subtitle, the taxable year of an S corporation shall be a permitted year.

§ 1378(b) Permitted year defined
For purposes of this section, the term “permitted year” means a taxable year which—

§ 1378(b)(1) is a year ending December 31, or

§ 1378(b)(2) is any other accounting period for which the corporation establishes a business purpose to the satisfaction of the Secretary.

For purposes of paragraph (2), any deferral of income to shareholders shall not be treated as a business purpose.

Here is the applicable section on Page 1 of the instructions for Form 2553:

7. It has or will adopt or change to one of the following
tax years.
a. A tax year ending December 31.
b. A natural business year.
c. An ownership tax year.
d. A tax year elected under section 444.
e. A 52-53-week tax year ending with reference to a year
listed above.
f. Any other tax year (including a 52-53-week tax year)
for which the corporation establishes a business purpose.

While they do mention using a different year, in practical application, this is rarely granted by IRS except in cases where the shareholders also have a non-calendar tax year.  When the S corp has a different tax year than its owners, it makes it more complicated for IRS to match things up between them, which is why they don’t like it.

If you feel you have a good case for using a non calendar tax year for your S corp, you can try to convince IRS to allow it.  I seriously doubt it will be granted; but I would be interested in hearing about your results with this request.

I hope this helps you understand the rules regarding S corp tax years.

Good luck

Kerry Kerstetter

 

 

Posted in corp | Comments Off on Allowable S Corp Tax Years

Corporations are made up of people

Posted by taxguru on July 16, 2012

From BlogComix2

It’s True: Corporations Are People – Jack Welch tries to counter the Left’s propaganda campaign about corporations that feeds their class warfare.  This isn’t news to those of us in the real working world; but it is to our Ivory Tower Marxist rulers and their followers.

 

Posted in comix, corp | Comments Off on Corporations are made up of people

Choosing A Fiscal Year

Posted by taxguru on August 23, 2011

Q:

Subject: Fiscal year question

HI Kelly, I went to your site about Choosing Fiscal Year. I have a question if you can help me. I have a new LLC created on 5/17/11. Recently I applied IRS online for EIN. Calender year is a defult on this so I have to elect Fiscal year now with form 1128. My question is can I elect 6/30 year end although 5/17/11 is the creation of the LLC?

Thanks

A:

You really shouldn’t be setting up new business entities without the assistance of a professional tax advisor.  It’s all too easy to make mistakes that may be impossible to remedy later on.

In this example, there are a few misconceptions you already have that an experienced tax pro would have alerted you to.

If you are choosing to have your LLC taxed as a C corp, you can choose the end of any month to be its fiscal year end, regardless of when it was chartered.

For example, if you want June 30 to be the fiscal year-end, that’s your right to choose.  You would need to file the initial 1120 covering all of the activity for the period from 5/17/11 through 6/30/11.  This 1120, or an extension (Form 7004), would be due 9/15/11.  You need to file that 1120 even if no actual activity took place or IRS will assume that you made millions of dollars.

When you have a brand new C corp, it has no set fiscal year-end, so the initial 1120 becomes the official notification to IRS of that fact. This is even if you used December 31 on the SS-4.

You do not need to file Form 1128 to designate the tax year for a new corp that has not filed any 1120s.  Here is a direct excerpt from Page 1 of the 1128 instructions:

Exceptions
Do not file Form 1128 in the following circumstances.

Corporations

• A corporation adopting its first tax year.

Good luck.  I hope this helps.

Kerry Kerstetter

 

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

Posted in corp, Fiscal Year, LLC | Comments Off on Choosing A Fiscal Year

S Corp Waiting Period

Posted by taxguru on July 25, 2011

Q:

Subject: a question about converting s corp to c corp

Hello Kerry,

I read your article on converting s corp to c corp and you said when converted, the c corp cannot be changed back to s corp for at least 5 years. I’m wondering if you have official IRS documents supporting that 5-year restriction. We have a client that converted to c corp from s corp in 2009 and now wants to switch back to s corp. I told my boss we cannot do that but she affirmatively said there is a way to reverse the revocation, which I didn’t find. If you can show me the official publication about the cannot change back for 5 years restriction, I can show it to her. The link of your article is: http://www.taxguru.org/corps/scorp.htm Thanks for all your help! Have a great weekend!

Best,

 

A:

That five year waiting period has been around a long time.  Here is the relevant info from Page 19-6 of the latest edition of TheTaxBook:

Five-Year Waiting Period for Reinstatement

If an S corporation election is terminated, whether
by shareholder revocation, ceasing to qualify, or
violating the passive income restrictions, a five-
year waiting period applies during which the
corporation cannot re-elect S corporation status
without IRS consent. [IRC §1362(g)]

From the IRC:

§ 1362(g) Election after termination

If a small business corporation has made an election under subsection (a) and if such election has been terminated under subsection (d), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.

As I constantly advise, it is generally easier to just charter a brand new corp than to mess around with converting from C to S or vice versa.

I hope this helps.

Kerry Kerstetter

 

Follow-Up:

Dear Kerry,
 
Thanks for you immediate response and sorry for writing back to you so late.  I think my boss is determined to go around that 5 year waiting period and I’ll be writing to the Secretary for consent. I’ll let you know how that goes.
 
Best,

 

 

 

Posted in corp | Comments Off on S Corp Waiting Period

Corp Fiscal Year Selection

Posted by taxguru on July 24, 2011


Q:

Subject: Blog: Fiscal Year End

Hello TaxGuru,  

Love your blog. Read your article on Choosing a Fiscal Year (posted Jan. 2010), and was hoping you could answer a question for me. I started a business in March 2011, incorporated in Delaware, and operate as a foreign stock corporation in California. On the EIN, I (predictably) chose December 31st as the end of my fiscal year. Your blog suggests June 30 as the ideal corporate year-end date. Aside from the 1128 form you listed, is there anything else I would need to do to make this change? (i.e, amend articles of incorporation? File anything with Delaware and California?). Would really appreciate your advice.  

Respectfully,

  Aspiring 25 year old entrepreneur  

A:

You should be working with a professional tax advisor; especially one who is experienced with multi-state corporate taxation.  It is very easy to screw things up and get into big trouble with the FTB.

As I have said in multiple articles, the fiscal year for a brand new C corp is not officially established with IRS until you file the first 1120 with them, regardless of what you may have entered on the SS-4. You don’t need to send them anything other than your first 1120, or the extension (7004), for the FYE 6/30/11 by 9/15/11.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you Kerry. Much appreciated!

 

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

 

Posted in corp, Fiscal Year | Comments Off on Corp Fiscal Year Selection