LLC electing S-Corp Status

[Jesse]

Back in 2008 my out-law relative fell for a get rich quick scheme that didn't go anywhere. Worked online with a company out of state to create a LLC which filed Form 2553 for S-Corp status.

There was a 1099MISC issued in his personal name and social security number that was not reported on the original tax return and so of course a CP2000 was issued. If done correctly the income should/would have been for the LLC(S-Corp).

I'm not sure where to go from this point, Schedule C income and expenses I can handle but I do not work with S-Corps at all.


If he elected, but never filed, would the S-Corp still be required to file? If so, what kind of penalties are likely? Is there anyway to get this out of S-Corp to a disregarded entity? Any other repercussions to be aware of?

Second issue, this was done while a resident of Minnesota - any advice from Minnesota preparers?

[BHoffman]

Relatives are always the worst clients. Here's my best shot:

So, you are saying that the client did not report the 1099M income anywhere on his personal return, and a form 1120S was not filed at all? And you are saying that the SCorp never did any business at all?

If that is the case, then you can file a first and final 1120S with no activity. Just check the boxes. And you can respond to the CP200 for his 2008 personal returns by preparing a Schedule C, with all of the business income and expenses and he'd better have all the receipts.

Have to ask someone else about the MN return, but I think it can be amended to show the Schedule C, and perhaps you file the State version of 1120S the same way as the Fed - first and final with no activity. Might have to dissolve the LLC in the state, but that's a legal matter.

He may get a penalty for late filing on that 1120S, I think it's $85 per shareholder per month up to $(I forget), but IRS will forgive the penalty one time. Since this is a first and final, there shouldn't be any other penalties. I don't know about MN.

[erchess]

Clarification

Ms Hoffman or anyone would the first and final s corp return be for the first year it existed or 2008 or some other year?

[BHoffman]

I'm guessing 2008 was the first year. Nice catch

[Jesse]

Relatives are always the worst clients. Here's my best shot:

So, you are saying that the client did not report the 1099M income anywhere on his personal return, and a form 1120S was not filed at all? And you are saying that the SCorp never did any business at all?

It's not a close relative by any means, relatives that know it all are the worst, and if he wasn't so knowledgeable he wouldn't be in this predicament to begin with if you know what I mean!!!!

He did not report the 1099MISC income anywhere and he had a sole prop business before forming the LLC, formed an LLC electing S-Corp status, and continued business.

[Jesse]

Now for the rest of the story....it appears this guy had this "business" ongoing since 2005 under his own name and social, but was advised that if he formed the LLC he could deduct all losses, so in 2008 formed the LLC with a no income tax state, advised again that he wouldn't have to pay any MN state income tax. (Why he was worried about income tax with only losses - makes a lot of sense!) This explains why the 1099MISC came in his name & # and not that of the S-Corp.

He never changed anything else, never conducted any business under the LLC, so what I may suggest is filing the tax return as a Sole Prop/hobby (to be discussed) and file the 2008 first and final with no income, no expenses. Any thoughts?

[BHoffman]

Now for the rest of the story....it appears this guy had this "business" ongoing since 2005 under his own name and social, but was advised that if he formed the LLC he could deduct all losses, so in 2008 formed the LLC with a no income tax state, advised again that he wouldn't have to pay any MN state income tax. (Why he was worried about income tax with only losses - makes a lot of sense!) This explains why the 1099MISC came in his name & # and not that of the S-Corp.

He never changed anything else, never conducted any business under the LLC, so what I may suggest is filing the tax return as a Sole Prop/hobby (to be discussed) and file the 2008 first and final with no income, no expenses. Any thoughts?

I agree with your plan. Don't know about the hobby part without the details, but filing first and final 1120S with no activity and reporting the 1099M income somewhere on his 1040 sounds like the way to go.

[Jesse]

Thanks again! I'll have to check with MN now.

I'm a one person office so as he noticed I'm quite busy (the shortage of patience could've eluded to that) he asked if I needed help! Ha-ha!!!