LLC S-Corp To Sole Prop

[geekgirldany]

Client formed an LLC in 2013. Client did not understand (I could tell he did not) about how an S-Corp functions. The prior accountant filed an S-Corp return with an late election. Included mileage that was not reimbursed through bank account and did a few other questionable things. Bascially, Sche C slapped on a S-Corp Return. No W-2 Wages. Accountant suggested a super low salary. The business net income is around $45,000 so no need to ever do an S-Corp.

Okay, so client wants to stop S-Corp and wants to be Schedule C.

Can a Form 8832 be sent in to change the LLC from an S-Corp to a Sche C? An disregarded separate entity? He would like to keep the LLC Name.

It appears so but want to make sure.

[DaveinTexas]

This happens too often

My favorite conversation with clients starts with, "Hey, regarding that LLC you started this year, do you remember any tax elections you made for the LLC?" Client....blank stare....

By filing a final year 1120S this will change the tax status from S Corp to a SMLLC. IF your client is the Sole Member of the LLC, the default taxation is DRE (Disregarded Entity). He will have a short year 1120S to file, due by the 15th day of the 3rd month following the dissolution date. For the remainder of the year his income/expenses will be reported on a Schedule C. Basically you will have to follow all of the formalities of shutting down this S Corp if this is what the client wishes to do.

I don't know if it wouldn't be beneficial to continue to operate as an S Corp, how large would his salary have to be with a Net Profit of $45,000, right? But I know it can be more of a headache than what it may be worth in tax savings.

You may want to also consider filing form 966 (informing the IRS of the dissolution); see the instructions for the due date and where to file the form. By the way, filing the final year 1120S will not dissolve the company with the State, the entity will live on until it is officially dissolved using the proper methods to do so.

Good luck to you and your client!

[geekgirldany]

Thanks Dave!

Did not know which way to go with it since I've never had anyone want to go back to an Sole Prop.

Client would only save around $200 bucks doing the S-Corp the right way with wages. The $45,000 net profit would be taken away by the correct salary which would be $45,000 to $50,000.

[DaveinTexas]

Playing the devil's advocate here

Thanks Dave!

Did not know which way to go with it since I've never had anyone want to go back to an Sole Prop.

Client would only save around $200 bucks doing the S-Corp the right way with wages. The $45,000 net profit would be taken away by the correct salary which would be $45,000 to $50,000.

You mentioned mileage reimbursement in your post. If the client drives 20,000 business miles a year, let's say, that reimbursement to him is non taxable and it frees up $11,200 (20,000 miles X .56) of that $45,000 salary. Just thinking out loud. But I do like Sole Props too for the possible HRA benefit and/or hiring kiddos to assist in the family business.

[geekgirldany]

Bring this topic up again, I read on Form 966 that a resolution to dissolve is necessary. I know the client will more than likely not want to have a lawyer officially dissolve it... not sure either if it should since he wants to keep the LLC open.

Could a short year tax return be filed, no Form 966? Also can an extension be filed for that short year return so it can wait until the 2014 forms are released?

I can talk to the client but again pretty sure he will just want to handle all the tax returns next year.

Thank you
D

[mastertaxguy]

Llc sub s election/s corp treatment terminated.

1. form 966 is for corporate dissolution. That would not seem to apply here. Thus, there is nothing to be dissolved at the state level UNLESS TP AND/OR PRIOR ADVISOR SET UP A CORPORATION WHICH OF COURSE, OPENS UP ANOTHER AREA OF INQUIRY.
2. Your facts state the TP set up an LLC and made an S-corp tax treatment election and we have to assume and presume such an election was made on form 8832. There is no corporation, based on your facts, to be dissolved. The election to be treated as an S corp for tax purposes does not create an entity.
3. IRS Publication 3402, page 4, upper left column, mentions that an LLC that has made an election to be treated as an S Corp can undo that (even within 5 years). It mentions using form 8832 to accomplish that.
4. One might use form 8832 and check the boxes provided. I might read line 6c " domestic eligible entity with a single owner electing to be disregarded as a separate entity" as meaning the TP is revoking the 8832 and 2553 elections, and going back to being a Schedule C TP with a single member LLC, perhaps attaching a note/statement to that effect.
5. Keep in mind you will have, as noted, two returns to do unless the termination of the S election is effective at calendar year end (assuming the TP is not a fiscal year taxpayer).

[Burke]

The $45,000 net profit would be taken away by the correct salary which would be $45,000 to $50,000.

I don't think you ever want to claim a salary in excess of profits, unless I am missing something.

[geekgirldany]

Thank you both for replying.

Tax guy... that is how I am leaning. I actually submitted this as a research question to NATP. I will see what they say also.

Burke, on the salary, the prior accountant told him to only do $15,000 a year in salary. I did not write it correctly. I guess what I meant was there is no benefit in him being an S-Corp because the net income before payroll would only be $45,000 to $50,000 and that is what he should be getting in salary.

[DaveinTexas]

Form 8832

1. form 966 is for corporate dissolution. That would not seem to apply here. Thus, there is nothing to be dissolved at the state level UNLESS TP AND/OR PRIOR ADVISOR SET UP A CORPORATION WHICH OF COURSE, OPENS UP ANOTHER AREA OF INQUIRY.
2. Your facts state the TP set up an LLC and made an S-corp tax treatment election and we have to assume and presume such an election was made on form 8832. There is no corporation, based on your facts, to be dissolved. The election to be treated as an S corp for tax purposes does not create an entity.
3. IRS Publication 3402, page 4, upper left column, mentions that an LLC that has made an election to be treated as an S Corp can undo that (even within 5 years). It mentions using form 8832 to accomplish that.
4. One might use form 8832 and check the boxes provided. I might read line 6c " domestic eligible entity with a single owner electing to be disregarded as a separate entity" as meaning the TP is revoking the 8832 and 2553 elections, and going back to being a Schedule C TP with a single member LLC, perhaps attaching a note/statement to that effect.
5. Keep in mind you will have, as noted, two returns to do unless the termination of the S election is effective at calendar year end (assuming the TP is not a fiscal year taxpayer).

is no longer required to be submitted for an LLC to elect S Status if the election to be taxed as a Corporation and an S Corporation on the same date. An eligible entity that makes a timely and valid election to be classified as an S corporation will be deemed to have elected to be classified as an association taxable as a corporation. (Regs. Sec. 301.7701-3(c)(1)(v)(C). Shutting down the S Corp for Federal Tax purposes is treated as a dissolution.

So, if the S election is revoked, the entity then becomes a C Corporation (see reason why above) so a dissolution is appropriate, therefore a form 966 should really be filed. Although there is no penalty for not filing the Form 966 (unless the entity is a QSST or if there is a significant change in control or capitalization). See IRC 6043 and 6652.

[mastertaxguy]

Form 8832 or Not form 8832???

Well, the prior post raises an interest point.

True, the regulations state:

(C) S corporations. An eligible entity that timely elects to be an S corporation under section 1362(a)(1) is treated as having made an election under this section to be classified as an association, provided that (as of the effective date of the election under section 1362(a)(1)) the entity meets all other requirements to qualify as a small business corporation under section 1361(b). Subject to Section 301.7701-3(c)(1)(iv), the deemed election to be classified as an association will apply as of the effective date of the S corporation election and will remain in effect until the entity makes a valid election, under Section 301.7701-3(c)(1)(i), to be classified as other than an association.

301.7701-3(c)(1)(i) states (at least on my copy);

(1) Time and place for filing --
(i) In general. Except as provided in paragraphs (c)(1) (iv) and (v) of this section, an eligible entity may elect to be classified other than as provided under paragraph (b) of this section, or to change its classification, by filing Form 8832, Entity Classification Election, with the service center designated on Form 8832. An election will not be accepted unless all of the information required by the form and instructions, including the taxpayer identifying number of the entity, is provided on Form 8832. See Section 301.6109-1 for rules on applying for and displaying Employer Identification Numbers.

I'll stand by my earlier post.

There is NO S corp to be dissolved or shut down. We must not confuse an election by an entity eligible for non-default tax treatment as creating another entity. In this scenario, there is an LLC that, from the scenario, will continue to exist. The election to be taxed as an-S corp is being rescinded, or proposed to be rescinded, as of a specified date.

Form 8832 itself, lines 3 and 4, to me at least, clearly indicate that an LLC which has elected to be taxed as a corporation, S or C, and which has a single member, can revert to disregarded entity status. I refuse to believe that IRS puts things on forms that do not mean what they state (say). Which is why box 6c provides for disregarded entity status. The instructions to form 8832 (and yes, instructions are not substantial authority) state:

Line 6. Check the appropriate box if you are changing a current classification (no matter how achieved), or are electing out of a default classification. Do not file this form if you fall within a default classification that is the desired classification for the new entity.

Is this not what the scenario describes: an entity changing a current classification back to the default classication (single member LLC-disregarded entity)? (line 6 of the form)?

True, other provisions of the regulations may create an issue, but the scenario seems to indicate no returns have been file. (specifically, 301.7701-3(c)(1)(iv)).

Of course, the TP could set up a new LLC, transfer assets and all that and dissolve the current LLC but I am not convinced that the "unelection" of S status is not appropriate.

Reasonable minds may differ.

[geekgirldany]

Well, I got a response from the NATP... they said to do both.

Form 8832 will tell the IRS that the EIN is no longer associated with an S-Corp and is an disregarded entity. Form 966 needs to be used to dissolve the S-Corp. So they say both.

[DaveinTexas]

I concur

Well, I got a response from the NATP... they said to do both.

Form 8832 will tell the IRS that the EIN is no longer associated with an S-Corp and is an disregarded entity. Form 966 needs to be used to dissolve the S-Corp. So they say both.

How much are they charging these days for questions? Just curious.

[geekgirldany]

They charge $31 a question now. As a member I get the first one free and then have to pay. So I used up my free one for the year.