Q:

Subject: c corporation question

I am utilizing the information that you provide as a guideline to set up my C Corporation. Are you saying to use Corporation or Inc., etc. in the name? It sounded like you are saying to avoid these words.

Thanks very much.

A:

Regarding the selection of a name for a corp, you seem to be misunderstanding the point I was trying to make.

I have never had any problem with the use of a corp signifier in the official name, such as Corporation, Inc, or Ltd. In fact, most states require one of these to be used as part of their chartering.

What I have long seen as a bad choice was to have the owners’ personal names as part of the corp name. Too often, people just put Inc or Corp after their own names.

One of the many benefits of working with a corp entity is the ability to have more privacy and anonymity than you would have by using your own personal name. As we all know, in this day and age there are fewer and fewer aspects of our personal and business lives that we can keep private. This is why I have aways liked the idea of using a generic non-descriptive name for the official corp filing. I have seen people use a few initials, parts of their kids’ or grandkids’ names and even completely made-up words for their official corp names. It doesn’t matter that nobody can understand the meaning of the corp name. It’s nobody else’s business.

Even with the generic non-descriptive official corp name, you can still also lock in some DBAs to show to the public if that would be helpful for conducting your business operations. Behind the scenes tasks, such as buying and selling properties and filing tax returns, would be under the generic official corp name. This makes snooping on your confidential affairs more difficult with Google and other tools at everyone’s disposal nowadays.

I hope this helps you better understand my feelings on naming corporations.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,
I am sorry. I did misunderstand. Thanks so much for the clarification. I look forward to working with you in the future.

Going through some old emails in my in-boxes, I came across this short piece from PC Magazine, reviewing some of the main online services for setting up a corp or LLC. 

The article glosses over the critical issue of consulting with a qualified professional tax advisor before deciding which particular entity is appropriate for a particular situation.  The following generalization is completely wrong and misguided.

For most small businesses, the C corporation option isn’t in play, given its complexities and required reports and other filings, along with corporate taxes.

As I’ve explained frequently, C corps are very often much better fits than S corps and are actually much less complicated to handle than are S corps and LLCs. 

Q:

Hi – Very helpful information on the web. I have one quick question – if my company is a C Corp and has a loss can I deduct that on my 1040? Thanks!!

A:

No.

An S corp can possibly have its losses flow through to your 1040, but a C corp doesn’t work that way.

Setting up a corp without understanding how it works was very foolish and dangerous.  You need to get with a professional tax advisor ASAP to straighten things out before you do any more damage.

Good luck.

Kerry Kerstetter

Follow-Up:

Its kind of you to respond but there is no need for that demeaning attitude.

My reply:

I’m sorry if I offended you, but I assure you that it is for your own good.

I have long had a reputation for telling it like it is and not sugar-coating the truth.  Anyone writing to me for advice can expect that kind of response.

In your situation, it is obvious that you, as do may other business owners, jumped into setting up a corporation all by yourself without consulting with knowledgeable professionals.  The consequences of this reckless and irresponsible act can be very expensive as you most likely have already violated all kinds of tax and legal requirements.

For your own sake, you need to start working with a qualified tax pro ASAP before you get yourself into more trouble.

Good luck.

Kerry Kerstetter

Q:

Subject: C Corporation and S Corporation question

S-Corporation.  I did some research and I believe that I qualify as I am the only officer/member.  My questions are:

1.       Based on the researc0h I did, it seems that with a c-corp I can wait until November to file my taxes (no gains, only losses) which is the anniversary date.  Is this correct?

2.       If the s-corp falls into the same category as individual income tax, I assume that with an s-corp, the deadline to file the taxes is april 15th.  Is this correct?

3.       Assuming number 2 is correct, if I wait until after April 15th to convert my c-corp to an s-corp, do I still have to file the taxes by November or can I wait till the following year (January through april 15th) to file the taxes?

I am totally clueless with this and the IRS website is somewhat confusing.  Please help me.

Thanks so much!

Have a beautiful evening!

A:

You need to be working with a professional tax advisor before you do anything else because your research is obviously not working.  Just from the items you mentioned, there are several misconceptions you have, and I’m sure you have dozens more that you didn’t mention.

Here are just a couple of issues that you are confused about.

Tax Year – If you remain a C corp, its tax year can be set to end at the end of any month prior to the one year anniversary of the incorporation.  There are many reasons for using a tax year other than December 31, as I mentioned on my website.    The corp tax return (1120) or an extension (7004) is due to IRS by 2.5 months after the end of the tax year. Once you have filed your first 1120 and established the tax year for that corp, it is set in stone.

If you do successfully convert to an S corp, its tax year must go from January 1 through December 31 and its filing deadline will be the next March 15.

While there are some exceptions for filing the S election (2553) late, the normal deadline is by March 15 of the year in which you want it to take effect.

Before you take the step of electing to be an S corp, you most definitely need to work with an experienced professional tax advisor to see if that is a good idea and to make sure you understand completely how to operate your corp (C or S).  You are guaranteed to get yourself into serious trouble if you continue to try to muddle through these things on your own, if you haven’t already.

Good luck.

Kerry Kerstetter

Q:

Subject:  Filling my s-corp and 1040 returns together

Hello,
 
I found your email via an article you wrote on http://www.taxguru.org/corps/scorp.htm. If you don’t mind I would like to ask you if it is possible for me to include the money I spent or invested in my s-corp on my 1040 taxes form that I will be filling from my regular employment. I have a regular job where I work 40 hours a week and I have my S-corp that I am investing in with my personal money from work. I am still working on my business and hence have not generated any revenue in my business.
 
Thanks, I appeciate your time and answers.

A:

You need to be working with a professional tax advisor before you do anything else because you have very obviously gotten in over your head by setting up an S corp without having a clue as to how it works.

Just from the items you mentioned, there are several misconceptions you have, and I’m sure you have dozens more that you didn’t mention.

Money you invest into the S corp isn’t a deductible item. However, if there is a net operating loss inside the corp that can be passed through to your 1040, you may be able to have some offset to your W-2 income.

Before you go any further, you most definitely need to work with an experienced professional tax advisor to see that your S corp tax return is prepared properly and then that your 1040 is also prepared correctly.   You are guaranteed to get yourself into serious trouble if you continue to try to muddle through these things on your own, if you haven’t already.

At this late date, you should be filing an extension for your 2008 1040 in order to give yourself enough time to get things done properly.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for the advice. I will contact a tax advisor. It’s for a website that I created and the only monies or funds that I have spent are $1000.00 and my monthly hosting account which is $10.00 per month.   

Q:

Subject:  article on S Corp termination (converted to C Corp)

Thanks, informative.
 
2 1/2 month rule, 5 years, etc.
 
My question, if you’d be so gracious to answer…
 
It is a “formal request” to the IRS?
Just a letter??
No Form (reverse 2553 form)???
 
Thanks!

A:

Surprisingly, there is no official IRS form for revoking the S election.  A statement including certain info is required to be submitted to IRS.

Your own personal professional tax advisor may already have a template to use.  There are also other ones available from tax reference publishers, such as the following ones I copied and pasted here.

From Page 19-5 of TheTaxBook:   

Shareholder revocation. The S corporation election may be revoked with the consent of shareholders holding more than 50%  of the shares of stock of the corporation. A revocation made on or before the 15th day of the third month of the taxable year is effective as of the first day of the taxable year (March 15 for a calendar year corporation).

Revocation made after the 15th day of the third month of the tax year is effective for the following taxable year.

Revocation can be made for a prospective date which is on or after the date the revocation is made. [IRC §1362(d)(1)]

Corporation statement. The corporation files a statement of revocation, signed by an officer who is authorized to sign Form 1120S, with the IRS Service Center where the original election was filed.
Include the following information:
• A statement that the corporation is revoking its S corporation election under IRC Section 1362(a).
• The corporation’s name, address, and EIN.
• The number of shares of outstanding stock.
• The effective date of the revocation.

Shareholder statement. A statement signed by the shareholders, under penalty of perjury, which includes:
• The name, address, and EIN of the consenting shareholder.
• The number of shares owned by the shareholder.
• The date the shareholder acquired the stock.
• The shareholder’s tax year end.

From the CFS Tax Corresponder program:   

Statement to Revoke Sub chapter S Election (IRC Section 1362(d))

To:  Internal Revenue Service
    

Re:  [Client: Taxpayer & Spouse name(s)/Company Name]
[Client: Street address, Apt/Ste/PMB #, plus line 2 (if any)]
    [Client: City, State  Zip]
    ID: [Client: Taxpayer’s SSN/Company FEIN]

The above mentioned company hereby revokes its election under IRC Section 1362(a) in accordance with IRC Code Section 1362(d).  As of  , there are shares of issued and outstanding shares of stock in [Client: Taxpayer & Spouse name(s)/Company Name].  Attached are signed consents by all shareholders holding more than one-half of the issued and outstanding stock in [Client: Taxpayer & Spouse name(s)/Company Name].

[Client: Taxpayer & Spouse name(s)/Company Name]

By: ____________________________
             (Title)

Date: _____________________

Attachment of Shareholders to Statement of Consent to Subchapter S Revocation

The undersigned shareholders in accordance with IRC Section 1362(d) hereby consent to the revocation by the [Client: Taxpayer & Spouse name(s)/Company Name], ID# [Client: Taxpayer’s SSN/Company FEIN] of its election under IRC Section 1362(a).  Such revocation is effective .

By:  _____________________________________    ___________________
        Date
    
    
    ID:

By:  _____________________________________    ___________________
        Date
    
    
    ID:

By:  _____________________________________    ___________________
        Date
    
    
    ID:

At the time of this revocation, the issued and outstanding shares of the  [Client: Taxpayer & Spouse name(s)/Company Name] are held as follows:

       
       
       

As I have mentioned on several occasions, before you take the step of revoking the S election and subjecting your corp to the limitations that entails (12/31 year end, etc), you should work with your own professional tax advisor to see if setting up a new C corp in addition to the existing S corp would be a better plan.

I hope this helps.  Good luck,

Kerry Kerstetter

Follow-Up:

Really cool of u.  Actually its a smllc to c corp.  Form 8832.  And I am a tax advisor.  Pleasure to make your acquintance!

Q:

Subject:  s versus c article

I read your article with some interest and have a question about your tax splitting.

Lets say the C-corp does a split and takes $50k in a 15% bracket. Now what? A C-corp doesn’t have to buy food or put a kid through college. Why is it helpful for the C-corp to have 50k in the bank, especially if you are an individual with small company and just want all your money in your pocket so you can buy cocaine?

A:

The effective use of C corps to shift and smooth out income is a multi-year process; so looking at one year’s end result isn’t the best way to evaluate it. Any experienced professional tax advisor should be able to assist you with implementing these tactics in the best way for your particular goals and situations.

So, in addition to your particular financial priorities, be sure to budget enough money to pay for the services of a good professional tax advisor.

Good luck.

Kerry Kerstetter

Q:

Subject:  C Corporations

How do I find an accountant in my area that is comfortable with C corporations. It seems like each one I talk to wants to continue to steer me away from them?

 
A:

That is frustrating; but look at the good side of that situation.  Any tax pro who doesn’t understand how to utilize C corps effectively is doing you a huge favor by admitting his/her shortcomings up front, saving you from wasting a lot of time.

As I have repeatedly said, C corps are not automatically a one size fits all solution for everyone any more than S corps are.  Any tax pro who can’t logically explain his/her rationale for recommending any particular strategy, including the fact that all of the pros and cons that I have spelled out have been evaluated, is to be avoided.  Anyone who automatically rules out C corps without asking you a ton of questions and tries to assume that an S corp is automatically the right approach is too lazy and/or ignorant to be trusted.

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.  

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.  

You should note that geographic location should not be the main criterion for selecting a tax pro.

I wish I could be of more assistance; and I wish you the best of luck.

Kerry Kerstetter  

Q-1:

Subject:  S-Corp vs. C-Corp

Kerry,

I read your article on S-corporations vs. C-corporations.  Thank you.  The article was very informative.

I suppose one benefit of S-Corp status would be in a situation where the entity generates significant losses early in the life of the company and the individual has other taxable ordinary income from which these losses can be deducted.  The present value of deducting those losses would likely be beneficial versus being trapped as NOL’s in a C-Corp. 

Am I thinking about this correctly?

A-1:

That is one way to look at this. However, you have fallen into the trap of believing that a business only needs one entity for its entire existence.

A more useful approach would be to use an S corp during the loss years if they will be helpful on the 1040s of the owners and then, when it becomes profitable, set up a new C corp to use to accomplish such things as smoothing out the income, doubling the potential Section 179 deduction, and shifting income between fiscal years.

Any creative tax pro should be able to know how to use multiple entities for maximum tax savings.  Anyone who claims that you have to select one single entity at the beginning and use it exclusively for the lifetime of the business should be avoided.

Thanks for writing.

Kerry Kerstetter

Q-2:

Thank you.

If you expect losses in excess of your basis due to the use of debt to finance an acquisition, is there a structure that makes the most sense
to deduct those losses against other income?

Thanks again.

A-2:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.  You will need to work directly with an experienced tax pro who can analyze your unique circumstances.

I wish I could be more help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time.

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.   

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.  

You should note that geographic location should not be the main criterion for selecting a tax pro.

I wish I could be of more assistance; and I wish you the best of luck.

Kerry Kerstetter

Follow-Up:

Thank you