Q:

Subject: converting an S corp question

Dear Mr. Kerstetter,

Thank you very much for your article.  It is very helpful.  I have a question and wondered if you’d be kind enough to answer.

I started out with a C corp, and later our accountant suggested I change it to an S corp, which we did.  It was stupid but I felt intimidated and asked the accountant why it be to our advantage, and he assured me it would becasue of the “double taxation”.  Now I realize we might be screwed since I can’t change it back to a fiscal year ending in the middle of the year.

Is there anyway I can say my accountant advised me wrongly and change it back to the way I had it in the first place?

And if I can’t, this is our company that is now just starting to take off.  Does that mean I have to change the name?  Or is there anyway I can keep the name the same and change it back to a C corp?

Thank you very much,

A:

It sounds like the first step you need to do is to find a tax pro who isn’t one of the many who believe that S corps are a one size fits all solution for everyone, as yours seems to be.

As I’ve written on many occasions, switching from a calendar to a fiscal year for your corp is pretty much an impossible dream, even if you try to use the excuse that you were misled by a shortsighted accountant.  IRS isn’t in the business of helping you save money on taxes and will consider your experience with your current tax advisor to be your own fault.

Once you have a new tax pro, you and s/he need to see if a C corp really would be in your best interest.  If so, it will probably be most efficient to just set up a brand new C corp for which you can use any fiscal year you want. 

Then, you and your tax pro should look at whether you need to keep the existing S corp or dissolve it.  Depending on what kinds of businesses you are operating, as well as several other factors, there are plenty of very legitimate reasons for having both a C and an S corp.  I have seen this work out quite well for many people; especially if there are opportunities to shift income between a taxable and non-taxable state.

Good luck.

Kerry Kerstetter

Q:

Subject: Quarterly Tax Filings with a C Corporation

 

Mr. Kerstetter,

    Our company just became a full C corporation on 01JAN07 after being an LLC from start of business.  I am currently working with an outside accounting firm that is compiling our financials for 2006, I have recently come on board here (first day was 05FEB07) since the company has decided they needed a Controller since converting to a C Corp. and have to advise the owner as to his tax liability and payments. 

    My question to you is this:  After working with our Accounting firm we are about to realize $ 375,000- for 2006 before taxes.  In preparing for the 2007 tax year, I am currently accrueing for taxes based on 2006 Net Income.  On the quarterly filings what can I expect to pay out to the IRS????  I would think that the minimum would be $ 93,750- ($ 375,000 / 4) to avoid any penalties or charges.  Is there some way we can mitigate this payment to the end of year since we just became a “New” corporation and really don’t have a strong performance record in earnings???  Any advice would be helpful.

 

Thanks,

A:

I’m a little puzzled as to why you are asking me this because this is really the kind of thing that should be discussed with the corp’s professional tax advisors. 

Basically, as with individual income taxes, there are two main options with estimated tax payments.  You can pay in what you expect the actual taxes to be for the current year in four quarterly installments so that there is a zero balance due with the 1120; or you can pay in the least required by law so as to avoid late payment penalties, and then pay any remaining balance by the due date of the 1120.

For most corporations, those that have taxable income of less than one million dollars, it generally works out for the second option that you can pay in the lower of the previous year’s tax or the expected current year’s tax.

If 2006 was a boom year and 2007 looks as if it will have a much lower taxable income, there is no sense in paying in the same as the 2006 tax was.  You should calculate the actual tax for each portion on the current year and make payments accordingly.

IRS has Form 1120-W  for calculating corp estimated taxes.  It does allow for annualization of income, in cases where profits are not earned evenly throughout the year, with corresponding adjustments in the estimated tax payments.

Good luck.

Kerry Kerstetter

Follow-Up:

Mr. Kerstetter,

   Thanks for your valuable time in responding to my question.  I will be working with the company’s tax preparer’s but wanted to get a little insight into how I can minimize our tax payments in the next couple of months.  I was really impressed with your website and knowledge on the subject matter. Too bad you are not accepting any new clients or I may make a pitch to have our company work with you.  Please let me know if you are going to allow new clients anytime soon.

 

Thanks,

Q:

Subject: Frustrated in Missouri

Dear Kerry,
I am a professor at a nice Midwestern state university.  To save my university embarrassment, please do not include my email address or last name if you elect to post this on your blog (as you are welcome to do). I am writing because I am frustrated by all the steps my bureaucratic organization has placed in the way of quickly accomplishing some tasks under the guise of following the law.  If my university is correct, then I have been doing something wrong in my part-time business.  Therefore I am asking for your guidance.

When an organization hires someone to perform a service (in this case our department decided to hire two guest speakers for the benefit of our students), what are the legal obligations of the organization to obtain their social security number or other tax identification number?  Is there a cut off (in dollars) where this is necessary?  If so, what is this amount?

I can understand the IRS requiring us to obtain this information once a certain threshold has been reached (say $5,000 or more) so my organization could issue a 1099-Misc.  However, this seems a very poor use of time for small expenses like the $175 stipend we are trying to pay our guest lecturers.  In my own small business, I do not ask for a SSN or a TIN when I hire a consultant.  I recently paid an independent contractor $550 to design a website for my business.  When he finished the job, I simply paid him.  Did I break the law or a IRS regulation by doing so?  If not, is there one rule for private businesses and another rule for public (or semi-public) institutions?

If you tell me that there is no IRS requirement to collect this information for small services (and please be specific), I will take up the quixotic challenge of trying to change my institution.  On the other hand, if you tell me my institution is simply following the law by requiring us to collect this information (and then requiring a formal contract for even the smallest service), then I will apologize to my administrators and bring this up with my legislators.

Thank you,

A:

You really should check the IRS’s instructions for filing 1099 forms  to see the official requirements.

Basically, for payments to most unincorporated individuals for services, a 1099-MISC form is required to be filed with IRS if total payments during the calendar year are $600 or more.

From a logistical perspective, when to use Form W-9  or other means to ascertain a payee’s tax ID number is a little tricky.  Some businesses do require that info before any payments are made because it is too much hassle for  them to keep a running total during the year and only ask people when they are close to reaching the $600 threshold.  That is probably the case for your school and does seem to be fairly standard practice around the country. 

While this information gathering may technically be unnecessary for persons who will definitely not be receiving at least $600 during the calendar year; convincing them to stop asking for it is going to feel like spitting in the wind.  It has become so accepted a practice that you will have a very tough time convincing them to change.  It is unfortunately the case in this country that people (your school administrators) are so petrified of offending the IRS that they do go overboard and over-report payments made.  IRS actually likes this and will be of no help in persuading them to reduce their record keeping in this regard

As the 1099 instructions do explain, most payments to corporations are not required to be reported on 1099s.  Payments to attorneys are the main exception to this rule.  I have seen cases where both the payers and payees have only conducted business with other corporations.  If you are pursuing this on behalf of friends, you may suggest that they consult with their personal tax advisors regarding incorporating their businesses.

If you have been following the discussions of how IRS is supposed to close the tax gap, the main culprits they are after are small businesses who have all been tarred as being tax cheats.  This means that it’s only a matter of time before that $600 threshold is reduced to just 51cents (which rounds up to one dollar) and the exemptions for payments to corporations is removed.  This will make your entire crusade to reduce the ID gathering requirements at your school a moot point.

Although I’m obviously not being very helpful in your goal of reducing the bureaucratic paperwork at your school, I hope I have at least helped you understand more about why they are doing things that way.

Good luck.

Kerry Kerstetter

Follow-Up: 

Kerry,

Thank you for a fast and clear reply.  I found you (and your blog) today when I was searching for a CPA blogger in my frustration.  While I am still not happy about the paperwork (and may still aim at my school’s need to have contracts in place for basic services), you have convinced me that I would be wasting my time asking them to quit asking for ID numbers.

 

You’ve also gained a new reader.

 

Best regards,

 

 

IRS has updated its list of the Dirty Dozen Tax Scams.

Q:

From: “Marian Crenshaw” <mariancontrarian@gmail.com>

Subject: Child Support: 29% isn’t even enough. Try 50%

 

Dear Kerry,

 

I came across your web site while doing some academic research. I just wanted to let you know that there is a simple and obvious reason why child support is based on a percentage of the non-custodial parent’s income—-it’s because your children are entitled to the lifestyle that you can afford whether you live with them or not. Otherwise, why not just provide the bare minimum they need to survive? Or why provide anything at all? 

 

Think about it: they are, after all, YOUR children, not just your ex-wife’s. They deserve to have what you are able to provide for them and if that happens to result in a slight improvement in what your ex’s lifestyle might otherwise be, well tough toenails. Maybe you should have tried harder to work things out. Child support is about providing for YOUR kids (you know, the ones who are carrying YOUR name and YOUR DNA), not about spiting your ex.

 

Clearly, you are not thinking straight enough to consult with anyone on taxes. Perhaps you should re-consider whether a web site is appropriate. 

 

But then, who would seriously take tax advice from the Ozarks?

 

Marian Contrarian

A:

Marian:

Thanks for sharing your opinion on this matter.

I still can’t accept that as valid reasoning; especially in the context of the example I had written about.  In that case, as it is with countless other parents, the client was required to pay 29% of his tax return’s adjusted gross income, most of which consisted of purely paper income which was not in any way available for him to live on, much less for the benefit of his children. 

Your tone implied that I wrote my comments from a selfish perspective.  Nothing could be further from the truth.  I have never had any children, nor will I ever have any.  My comments were purely based on a sense of fairness.  To use the force of law to require a parent to share a fixed percentage of his/her wealth with his/her children is not right.  If a parent wants to voluntarily do this, that would be great.  It’s much like the issue of charity versus taxation that I posted on my blog yesterday.

You are obviously entitled to your own opinions on matters such as this, even if they are clouded by bigotry towards those of us who choose to live here in the beautiful Ozark Mountains.  I can assure you that my opinions wouldn’t be any different if I were still living in the more sophisticated San Francisco Bay Area, where I spent the first 38 years of my life.

Thanks for writing, whoever you are with your Nom de Plume.

Kerry Kerstetter

Q:

Subject: Quick Tax question

We formed an Corporation in 1999 (C corp) and bought a parcel of Land in October 2003. After the purchase we have had No income or activities in the prior years and no tax forms were filed.
In 2006 we got approved from IRS as an S corp for the tax year starting Jan 1, 2006. How do we handle the transfer of the parcel from the “C” to the “S” corp? What tax consequences will this have January 1, 2006.? We have income from a option on the land in 2006 and are preparing to file tax return on this, you understanding is that the “profit” of this income will be passed through to the partners?

Appreciate your comments.

A:

This is an issue that you must work on with an experienced tax pro.  If it is the same corp that is now being converted to an S, you aren’t technically transferring the land. 

However, there is a potential for what is called the Built In Gains Tax of 35% for IRS when there are appreciated assists in a corp that has converted from C to S and the assets are sold or distributed within 10 years after the conversion. 

You really should have discussed this entire mater with a tax pro before making the conversion; but hopefully a good tax pro can help you minimize or at least reduce the tax hit after the fact.

Good luck.

Kerry Kerstetter

Q:

Subject: question….

Dear kmk:

 I overheard a conversation about a corporation or a savings plan the other day regarding a SEP vs. SIMPLE. What were they talking about? Thanks

A:

SEP = Simplified Employee Pension
SIMPLE = Savings Incentive Match Plans for Employees

These are just two of the rapidly growing number of types of retirement plans that small companies and self employed individuals can set up for themselves and their workers.

The rules, limits and basic pros and cons of each type are varied.

You should work with your personal professional tax advisor, as well as an experienced employee benefits consultant, if you are considering offering retirement plans for your employees and/or setting one or more plans up for yourself. 

As I constantly have to remind everyone, there is no such thing as “one size fits all” in tax and financial planning.  Everything needs to be set up based on the unique circumstances and plans of those involved.

Good luck.

Kerry Kerstetter

 

Mallard Fillmore, with the well documented fact that conservatives are much more generous with their own money than are liberals; while liberals are much more generous with the money they have their IRS henchmen confiscate from the taxpayers.