Tax Guru – Ker$tetter Letter

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Archive for the ‘corp’ Category

Ark Corp Franchise Tax Due May 3

Posted by taxguru on April 26, 2010

This is a deadline that sneaks up on everyone as we focus on the April 15 deadline for individual income tax returns; especially since they moved the deadline up from June 1 a few years ago.

The May 3 deadline (because May 1 is on Saturday) applies to all corporations regardless of their income tax fiscal year.

The form is so easy to fill in that I have stopped doing it for my clients, letting them do it themselves. Even easier still is filling in the info online via the Secretary of State’s special webpage, which is what I have been using for our corporations over the past few years. They do charge an extra five dollars for the priviege of being able to charge the tax to a credit card; but the convenience is more than worth it.

Posted in Arkansas, corp | Comments Off on Ark Corp Franchise Tax Due May 3

Deadline for Converting C Corp to S

Posted by taxguru on April 20, 2010

Q:

Subject: your article

Mr. Kerstetter,

Allow me to thank you for the information on your blog and website. I have consulted it on several occasion and find it quite helpful.

I have a question about a statement you make in the following article: http://www.taxguru.org/corps/scorp.htm

The article deals with S elections. In the article you say, “…the shareholders must all sign and submit Form 2553 with the IRS to request that status. This can be done right away after the corp is originally chartered, or several years down the road.”

It was my understanding that a company had a limited time period after formation to make the S election and this appears to conflict with your statement above. Which is correct?

With kind regards,

A:

You are confusing two different things related to S corps.

It is true that a C corp of any age can be converted to an S if it meets the criteria.

However, where you seem to be confused is regarding the effective date of the changeover from a C to an S. For example, if an existing C corp (of any age) wanted to convert to S status as of 1/1/10, the 2553 signed by all of the shareholders would have had to be filed with IRS by 3/15/10 at the latest.

A 2553 can always be filed in advance of the effective date; but the deadline that trips most people up is when they want to make the election retroactive to a time before the 2553 is actually submitted.

As I have said many times, I am not a big fan of converting C corps to S. While it is legal to do so, this especially goes for long established C corps because of the many complications of accounting for items carried into the new corp status, such as retained earnings, NOLs, and appreciated assets, with their potential built in gains tax consequences. This is why I normally find it much simpler to set up a brand new corp that can elect the S status with no previous “baggage” to worry about.

As always, any plans having to do with the election or revocation of an S status should be discussed and analyzed very carefully with the assistance of an experienced professional tax advisor.

I hope this helps clear things up for you.

Kerry Kerstetter

Follow-Up:

Thank you, Mr. Kerstetter. That clears things up.

With kind regards,


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


Posted in corp | Comments Off on Deadline for Converting C Corp to S

S Corp Accounting

Posted by taxguru on April 7, 2010

Q:

Subject: S-Corp

Hi Kerry,
I just read your webpage on S-Corp vs C-Corp and was hoping you could help me with one problem I am having at work. I work for 2 partners, one owns 90% of the business & the other 10%. Each files a 1040 with their perspective S-Corp net profit. My question is if the they only distribute lets say 400K of a 600K taxable net profit and the remainder is in the bank account as operating capital, then when would they be able to distribute the remaining 200K they are being taxed for? Also is there an account I should open to keep track of there proportionate taxable income they are not receiving? Thanks for your help.

A:

Accounting for an S corp’s equity accounts is essentially the same as it is for a partnership. There should be a Capital account for each shareholder to keep a running tally of his/her capital contributions, capital withdrawals (aka Dividends), as well as annual shares of the net income or loss. This will enable you to see the amount of each owner’s equity that can be taken out tax free.

You should have the professional tax advisor who prepares the 1120S assist you in setting up your QuickBooks or other formal accounting system to be in sync with the tax returns.

Good luck. I hope this helps.

Kerry Kerstetter

Follow-Up:

Thanks for your help Kerry I do appreciate it.



Posted in corp | Comments Off on S Corp Accounting

Changing Corp Year

Posted by taxguru on April 5, 2010

Q-1:

Subject: Changing Fiscal Year


Dear Mr. Kerstetter,

I was just reading your post about choosing a fiscal year and I’m left slightly confused. You said that if you have not yet filed a corporate return, then there is no need to “ask” the IRS for permission to change the fiscal year, but then you leave Form 1128 at the bottom of the page. If we’ve not yet filed an 1120 (as we are in the midst of our first fiscal year), and we originally, when applying for our EIN, put 12/31/09 as our year end, then is it necessary to tell them we’re going to switch it?

Thanks,

A-1:
You seem to be under the impression that you have already officially selected a fiscal year when you filed the SS-4 to obtain your FEIN. That is not the case. Whatever you had on the S-4 is not officially binding.

When you file your first 1120, that is what officially establishes the tax year for that corp. If no 1120 has been filed, the year can end at the end of any month.

You really should be working with an experienced tax pro on matters such as this to avoid making mistakes that you will regret later on.

I hope this helps. Good luck.

Kerry Kerstetter

Q-2:

Thank you very much for your response. I just wanted to confirm this information. I have spoken to several accountants and I am a new lawyer myself — but I was thrown off guard by a woman at the IRS this morning who told me I would have to file a form (1128?) in order to change the fiscal year. We will just file the 1120 within 75 days of March 31, and that will take care of it.

I noticed you mention the fact you will be presenting videos on your web site at some point soon. If you ever need any production services, that is exactly what our company does.

Thanks again for your help,

A-2:
That is why asking for advice from the IRS is so dangerous. They are notorious for giving incorrect advice.

Just to follow-up on the timing required, the 75 days isn’t a requirement. I have had dozens of cases with new corps, where we filed the original 1120 very late and that established the tax year.

We have even had cases where we filed extensions on Form 7004 based on the year-end that we thought would be used and then, for various reasons, changed our minds as to the proper year-end to use. The tax year shown on the 7004 isn’t any more binding than the one shown on the SS-4. When we filed the actual 1120, that was the first and only official notification to IRS of the corp’s tax year that mattered.

I am planning to start my video programs off on a small scale; but will keep your company in mind if it needs to be done more professionally on a larger scale.

Good luck.

Kerry Kerstetter


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


Posted in corp | Comments Off on Changing Corp Year

Changing a corp tax year

Posted by taxguru on January 3, 2010

I’ve been teaching myself how to improve the vidcasts, and here is the first one with the semi-new style.  The built-in hyper-link to my article on corp fiscal years doesn’t seem to be working, so here it is.

 

 

 

Posted in corp, video | Comments Off on Changing a corp tax year

Think ahead when setting up corp

Posted by taxguru on December 11, 2009

If the future plans for a business include taking it public or bringing in venture capitalist funding, those will materially affect the most appropriate entity to use, usually ruling out an S corp, as I discuss in this vidcast.

 

 

 

Posted in corp, video | Comments Off on Think ahead when setting up corp

Using Multiple Entities – Vidcast

Posted by taxguru on November 22, 2009

Using multiple entities for tax, liability, and other business reasons has been a very common and useful strategy for longer than I’ve been in this business.  Why many tax pros are unaware or unwilling to recommend them is still surprising to me.

YouTube page

 

 

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

 

Posted in 179, corp, video | Comments Off on Using Multiple Entities – Vidcast

Income Shifting

Posted by taxguru on September 21, 2009

Q:

 Subject:  Tax issues-c corp

 Hi, thanks for the awesome website!  Lots of useful info.  However, I was wondering if you could clarify for me how the shifting of money between fiscal years works.  Why does it have to be at the end of the year?  How can I legitimately transfer funds to the corp and deduct them from my personal income?  Is the repayment in January and the paying of money from the corp in June or whenever two separate transactions?  Just trying to decide on the right business structure for the lowest amount of taxes on our precast concrete company.

thanks a lot!

 

A:

The income shifting is normally an ongoing process throughout the year based on what the businesses can afford.    However, it is also critical to have your professional tax advisor take a glance at how the net taxable income is looking about a month or so before the end of the entity’s tax year just in case there is a need to shift a lot more income than normal before year-end to get the income down to a reasonable tax bracket.

I have also been seeing some clients who have been shifting too much income during the year, creating a large negative taxable income; so that we need to make an adjustment in the opposite direction before the end of the tax year.

As I constantly warn. this kinds of strategy to shift income between entities is not overly complicated to do; but should not be attempted without the assistance of a professional tax advisor who understands the benefits of this.  Too many people simply look at their company’s bank balance as an indicator of their current level of net income; while an experienced tax pro knows that the actual taxable income figure will often be very different from the bank balance.

If your current professional tax advisor is one of those who believe that intentionally shifting income between entities is too much hassle to even think about doing, it’s time to switch to another tax pro who is not as lazy and is more concerned about helping you hold onto your money.

Good luck.

Kerry Kerstetter  

 

 

Posted in corp | Comments Off on Income Shifting

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.



Posted in corp | Comments Off on Reporting S Corp Activity

Deducting Rental Losses

Posted by taxguru on August 27, 2009

Q:

Subject: Rental property

Dear Kerry Kerstetter,

One of your clients is our friend and realtor. We are thinking about investing in rental property for tax purposes and later to use as a retirement source once the properties are paid for.
She told me that you have helped her so much regarding taxes. She suggested I should contact you to ask the following question.

If you are in the 35% tax bracket- do you get a better tax break by having the rental property under our names or by setting up a corporation to manage the rentals. We just want to be sure there will be a tax benefit by obtaining rental property and we have been given different advise and are not sure which is correct. She said you would know the answer to this question.

Thank you for your time.

A:

You are going to need to work with your own personal professional tax advisor on this matter because there is no easy cut and dried answer.

For example, it depends on what occupations you and your husband have. If either one of you qualifies as a Real Estate Professional (REP), you will be able to deduct your net rental losses against your other kinds of income, with no limit.

However, if neither of you qualifies as an REP, your net rental losses will be treated as nondeductible passive activity losses and will have to be deferred until future years when you have some passive activity profits, such as from the sales of rental properties.

I can tell this by the fact that you claim to be in the 35% Federal tax bracket, which means your Taxable Income is well over $300,000. The passive activity restriction phases out any rental loss deduction if your Adjusted Gross Income exceeds $150,000.

Using a C Corp sometimes makes sense because it is allowed to deduct rental losses up to the amount of other income. However, there is a downside to owning real estate in C corps because they don’t have the same special low long term capital gains tax rates that individuals can use.

A strategy that may be able to give you the best of both worlds is to own the property individually and lease it to your C corp, which can then operate it as a rental.

Your C corp would need to have net income from other operations in order to be able to claim the rental losses. If you don’t already have a C corp, even without the rental property issue, one could be used to shift some of your 1040 income so that you aren’t in such a high tax bracket. I have a lot of info on using corps on my website.

Your own personal professional tax advisor should be able to help you come up with the best strategy for your particular situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for your response. If you should ever take new clients please keep us in mind. This information was very helpful and I will look at your website.

Sincerely,


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


Posted in corp, Rentals | Comments Off on Deducting Rental Losses