Correcting S Corp Dates

[erchess]

Sushi Vegan (not her real name ) filed papers with the NC SOS to incorporate, filed papers with the IRS to be an Scorp, got her papers from NCSOS back in need of correction, got her S Status approved and then got her corp officially in existence. Then she operated her restaurant for a year keeping great records of her income and expenses and happily brought me her stuff so I could file her 1120S. My software wouldn't even try to efile with the date situation so we've gone paper. Can anyone tell me what to do to straighten this situation out? I don't think her S election is valid under these circumstances and I also can't believe it is terribly hard to straighten this out. It can't be that uncommon a situation. Any advice?

[ChEAr$]

Sushi Vegan (not her real name ) filed papers with the NC SOS to incorporate, filed papers with the IRS to be an Scorp, got her papers from NCSOS back in need of correction, got her S Status approved and then got her corp officially in existence. Then she operated her restaurant for a year keeping great records of her income and expenses and happily brought me her stuff so I could file her 1120S. My software wouldn't even try to efile with the date situation so we've gone paper. Can anyone tell me what to do to straighten this situation out? I don't think her S election is valid under these circumstances and I also can't believe it is terribly hard to straighten this out. It can't be that uncommon a situation. Any advice?

I don't see any problem. As far as IRS is concerned, she started operating as a corporation, so simply use the one earliest date for necessary software entries.
legally speaking, although I am NOT a lawyer (grin) the corporation existed from day one.

[erchess]

TY Harlan

Does anyone else have a different opinion? It goes against my grain to play around with dates things happened on a tax return when I know what happened when. It's bad enough when taxpayers don't know when they bought depreciable assets - only about half of my clients always have the sales papers from everything they bought every year.

[JohnH]

I agree with Harlan (always a smart move on my part). There are many situations in which IRS will recognize the existence of a corporation even when the legalities of the particular state are not satisfied (for example, when a corp's charter is suspended or revoked).

But since you are uneasy about the situation, why not follow the procedures for filing a late S-corp election? By doing this, you have covered all the bases. You disclosed all the relevant facts to IRS and invited them to let you know if they disagree for some reason. The worst thing that could happen is they advise you that the S-corp election isn't valid for the current period and it will become effective for the upcoming year.

If the corp has little or no profit in the year just passed, there's no real harm (other than potential exposure to the BIG tax if they sell within 5 years). Even if they do have profit, the net cost is only about 20% of the profit for year 1. That might be a small price to pay to insure that everything is OK and there are no ambiguities going forward. If the client complains, just tell them you didn't create the problem - they did.

http://www.irs.gov/irb/2007-41_IRB/ar13.html