Q:

Hello, Mr. Kerstetter,
I came across your website today. I was wondering if you can answer me a quick question:
Our fiscal year is April 1^st to March 31^st. What would be the time frame that we can change to an S corp?
Appreciate your help!

A:

You need to do some more research and work directly with an experienced professional tax advisor before you take the step of converting to an S corp. 

As I have explained several times on both my blog and website, one of the biggest pitfalls to converting from a C corp to an S is the fact that you will also have to convert your fiscal year to a calendar year, which will force you to lose all of the benefits of having a different fiscal year. 

You may find that retaining your current C corp and starting a new S corp will give you the best of both worlds.  A good professional tax advisor should be able to explain how using two corps can work in your best interest.

I don’t know how much of my website you have looked at, but here are some key pages you should study before consulting with a professional tax advisor:

Comparing S and C corps
   <a href="http://taxguru.org/corps/scorp.htm&quot;

Benefits of Different Fiscal Years
   <a href="http://taxguru.org/corps/taxyear.htm&quot;

S Election Instructions From IRS 


Good luck.  I hope this helps.

Kerry Kerstetter

Q-1:

Subject: SUB S CORP SHARE VALUE

Dear Kerry;
I have spent an afternoon on the internet trying to get some general information about this subject, without success. Our family has a Sub S Corp trucking company which is now 5 years old and is doing quit well. Onginally we set my youngest son up as sole incorporator and he takes 100% of the Sub s schedule k-1 on his personal incme tax return. We would now like to sell some shares of stock (ownership) to my older son and daughter. How do we figure out the value per share to charge my older son. It is not so much to make money but what the accountant and the IRS will accept.
Thanks

A-1:

There are several different ways to value small businesses, each yielding very different results.

Rather than have a professional business appraiser give you all of those value, it is generally easier to decide, for your current needs, if you want a high or low value and then work with your professional tax advisor to draw up an analysis to justify that number.  That will be a lot quicker and a lot less expensive for your needs.

Everyone involved needs to sit down and look at the short and long term aspects to whatever value you use.  A high value will possibly generate a capital gain for your youngest son, depending on what his current adjusted cost basis is for the shares he will be selling.  That will also give the new shareholder a higher cost basis to start with.

Conversely, a low share price will generate less capital gain, or possibly a capital loss for your youngest son, but will give the new shareholder a lower cost basis to start with. 

Again, working with your professional tax advisor, you may want to start by calculating the break-even cost basis of your youngest son’s shares and then have your tax advisor back into a calculation method that would justify that value for the shares. 

Good luck.  I hope this gives you some ideas of issues to discuss among yourselves and with your professional tax advisor.

Kerry Kerstetter

Q-2:

Kerry:

Thank you for the response. I would like to pay you for some consulting time to explore this issue further.First of all there was a typo, in that our trucking company has been in existence for just over 11 years.  Second, the reason for the change in ownership is there is a pending divorce. He has a prenup dated 7/2/2000, excluding the companies value prior to that time.

Our present accountant is a family friend and we wish to keep him out of the loop at this time. From the information you gave us it appears that a low share price would be desirable, but would it stand the scrunity in the divorce court.  We intend to consult an attorney once we establish the price per share and the logic by which it is derived.  Could we pay you to help us arrive at a reasonable price per share, along with the reasons used to get there? Could we provide you with our financial figures to give you something tangible to work with? I further suspect that upon the share price determination that the company Articles of incorporation along with the stock retirement agreement would have to be amended.

Thanks

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 all will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could 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. 

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

Kerry Kerstetter

Q:

Subject: S vs. C Corporations

Hi Kerry,
 
Thanks for the article “S vs. C Corporations” I got a lot of information from it.
 
I have a question for you, in the section of Fiscal Year you mentioned ” Toward the end of your personal fiscal year (12/31), you bleed off some of your taxable income to your C corp by paying it for something like rent or marketing services. In Jan, your corporation can pay it back to you.”  How I do that? If it possible you give me a detail sample?
 
I have a C corporation for several years, but never know any way to save tax. Please advice.
Thanks!
 
Best regards,

A:

Your big mistake has been in not working with an experienced tax professional who can show you how to properly utilize a corp to dramatically reduce taxes.  This should have been done from before establishing your corp so that you could start saving money from that point on. 

The income shifting techniques are not complicated and I have described many of the basic steps several times on my blog.  However, you shouldn’t try to set up the strategy on your own.  The assistance of an experienced tax pro is essential.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Changing from an S-Corp

 

Hello,

 I just read you blog this morning and had a very interesting question for you. Have you heard of and is it possible to change from an S-Corp to a Non profit of 501(c) organization.  I am really curious about this type of change

Thank you for your time

A:

The short answer is NO. 

The types of entities involved are not compatible for such a switch.

A C or S corp is a legal being chartered by a state as a for profit entity.

To qualify as a non-profit organization, you need to have your state charter a non-profit corporation, which is completely different from a for-profit corp and involves different paperwork.

You should be working with a professional tax advisor to straighten things out for your particular goals.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for your information.

Q:

Subject: S Corp. question

Hello:

I know you are not in California.  However, I was wondering if you could shed some light on a question.

I am an independent contractor (personal trainer), I have been filing a schedule C and paying city tax as well for the last 8 years.  I have grown my clientel where I personally earn +$150,000.  I think if I form an S Corp. I may be able to limit some of my tax liability.  For example, if I draw a $60,000 income, I can same on SS Tax, be only taxed (income wise) on the $60,000 and only pay a corporate profit tax on the remaining $90,000.

 

Does that seem correct to you?

 

I am just worried that the IRS will come back and say, “Hey, last year you made +$150,000 and now you’re claiming $60,000.  Where’s the rest?”  And I am afraid they won’t see the extra $90,000 as profit.

 

Any thoughts would be greatly appreciated.

 

Thanks,

A:

As long as you handle and report the corp and personal income and expenses properly, IRS shouldn’t have any problem with the fact that your business has gone through the normal transition from a Schedule C sole proprietorship to a corp.  I have worked with thousands of such businesses and I can’t recall one incident where IRS audited a tax return just because the taxpayer moved his/her business to a corp entity.  While there are obviously huge tax savings opportunities by using a corp, there are also other important reasons to do so, so IRS doesn’t automatically suspect a business owner of anything wrong just because s/he chooses to make that change.

Generally, in the first year or two, there is some overlap with ID numbers used on 1099s and other documents that could cause an IRS matching problem.  An experienced tax professional will know how to report these items in such a way as to avoid any actual problem with IRS and/or the State tax agency.

In regard to what particular steps you should be taking, 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 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. 

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

Kerry Kerstetter

Q:

Subject: Fiscal Year on your website

 

Hi Kerry,

 

I am starting a new LLC and C-Corp to move money back and forth based on this fiscal year principle, however, after reading on your website, I’m not sure I understand your comments “Toward the end of your personal fiscal year (12/31), you bleed off some of your taxable income to your C corp by paying it for something like rent or marketing services.”  I was not aware rent or marketing services is tax deductible on a personal level, correct?  I understand how you can do such a thing between entities, but not between entity and personal.  Could you please explain further?  Thanks.

A:

The payments from your personal funds do need to be deductible in order to make the income shifting plan work.  They should be deducted on whichever schedules apply to the kinds of income you have, such as C, E (Page 1 or Page 2) or F.  If all of your income is from W-2 sources, these payments can be deducted as unreimbursed employee expenses on Schedule A.

Do not try this on your own.  Any properly experienced professional tax advisor should be able to help you set this kind of thing up to work most efficiently for your particular circumstances. 

Good luck.

Kerry Kerstetter

Q:

Subject: quick S Corp question

Want to revoke S Status for corp. Never filed a corp return. Am three years behind in filing. Want to file as C with fiscal year ending in March 31. Is this possible. I believe we filed 2553 in 2004.

Tku

A:

It won’t be as easy as you think for various reasons dealing with both IRS and your state tax agency. 

You need to work with an experienced tax pro to work out the best method to resolve this matter.

Some possible issues you will encounter:

IRS and the State will probably refuse to accept the revocation until you file all of the past due 1120S returns.  Even with no activity, you have to let IRS and the State know that.  You didn’t say what state you’re in; but if you are in one with a minimum annual tax, such as California’s $800 per year, you are looking at some large past due amounts, including penalties and interest.

Since an S corp is required to have a tax year ending on December 31, you will need to formally request a change.  As I’ve mentioned several times before, IRS is not friendly to the concept of non-December tax years; so they are not very likely to honor your request.  Also as I’ve said on countless occasions, it may very well be much easier to set up a brand new C corp, where the fiscal year is completely open, than to try to adjust what you already have.

Again, an experienced tax pro should be able to help you straighten these issues out.

Good luck.

Kerry Kerstetter