2009 C Corp not filed

[SFBOB]

I am helping out an associate that picked up a new client that did not file his first year 1120 in 2009.100% shareholder did not pay[W/2] himself. He took money out as a distribution [wrong] I understand that.
As I see it we have 2 choices.[1] Pay the tax at the corporation level [15%] and issue a 1099 DIV for the distribution and pay the tax a second time on his 1040.
[2] Late file an S Corp election and let the distribution flow to his 1040 with a K-1. Problem here is that there is a $195.00 per month penalty per shareholder on a late filed 1120S. $195.00 times 12 is $2340.00 per year. Any preparers with corporation experience, please jump in on this one. Thankks a Bunch. Bob

[JohnH]

I'd report based on what actually happened. He has a corporation that paid a dividend out of its earnings & profits.

Unless the profit/dividend situation is above $60K or so, it doesn't make much difference on a net cash basis. When you factor in the 15% corp tax plus the income tax on the dividend, he and the corp combined are paying roughly the same amount of tax on the income. This is true even taking into account the double taxation aspect of it all. The only downside is that he isn't getting SocSec credit fot this year's earnings.

There may be other issues at the state level, but insofar as Fed tax is concerned, it's probably a wash. And going the C-corp route is a lot cleaner than the S-corp tap dance for this first year.

[kthurman]

I am helping out an associate that picked up a new client that did not file his first year 1120 in 2009.100% shareholder did not pay[W/2] himself. He took money out as a distribution [wrong] I understand that.
As I see it we have 2 choices.[1] Pay the tax at the corporation level [15%] and issue a 1099 DIV for the distribution and pay the tax a second time on his 1040.
[2] Late file an S Corp election and let the distribution flow to his 1040 with a K-1. Problem here is that there is a $195.00 per month penalty per shareholder on a late filed 1120S. $195.00 times 12 is $2340.00 per year. Any preparers with corporation experience, please jump in on this one. Thankks a Bunch. Bob

As I recall, there is an exception to the penalty as long as there are less than 10 shareholders and the deduction on the entity returns matches the offsetting income on the shareholder's return.

[Jiggers]

As I recall, there is an exception to the penalty as long as there are less than 10 shareholders and the deduction on the entity returns matches the offsetting income on the shareholder's return.

I think the exception for the penalty is for 1065's only. There isn't one on the books for S-Corporations.

[SFBOB]

My not dissolve the C Corp??

I am beginning to think it would be better to dissolve the Corporation. Pay the $800.00 to California and stay with a Schedule C. My associate say's he was told that he would get big deductions by forming a corporation. I have been in the tax prep business for 20 years. I would walk away from this guy, however my friend is trying to build a practice and could use the money.Thanks for your feed back everyone. Bob