election to be s corp

[oceanlovin'ea]

new client came to see me. Wife has an LLC, taxed as a sole proprietor. She has been a schedule C business for years. She is the business owner and handles books but husband does the actual work.

Last year's return did not show a profit on the schedule C....actually zeroed out with BUOH.
Husband would now like to get pay check from company so that he is earning social security credits. They were told that they needed to be an s corp in order for him to be an employee. So they applied to be an s corp.
I told that that husband can be wife's employee and she can do payroll for him as a schedule C business. They were shocked and didn't understand why they weren't told that.

Business was half of previous year and they are hopeful it will pick up but don't really know if that is going to happen. So now they are questioning if they really need to be an s corp.

Here is my question: They chose to be taxed as s corp at beginning of 2010 and made the election and received letter from IRS. Since the first tax return as an s corp has not been filed, can they change their mind and stay a schedule C? It is not like they want to revoke the s election. They want to pretend they never asked for it.

Linda, EA

[Gretel]

That probably depends greatly on how they did business and held themselves out to the public. Like what they used as letterhead and business cards, what was used for loans etc.. Was it LLC or Corp.? If they never used "Corp" in public you might have a good argument that it was only a shell and they actually never did business as a Corporation.

[JG EA]

Or maybe if they are really both in business and not just the husband working for the wife, it is better that it shows they are both in business. Do the Joint Schedule C's or even stick with the S Corp. You'd be doing extra work either way and they'd be paying more either way.

[oceanlovin'ea]

The do have a business name and an established LLC in just her name. So it is technically her business. But even as a schedule C he can be her employee.

They use the LLC name, it was just the tax structure that was to be an s corp.

Will they have to wait 5 years before they can elect the s election again if they revoke it now?

They actually did show income for 2010 and didn't do any payroll so it will all go on K-1 and to the 1040 with no se tax.

They really don't know if business will get better or if this is all there is going to be. They are trying different avenues of advertising.....internet and facebook.

Linda, EA