Personal Service Corp Confusion

[geekgirldany]

Potential new client is an attorney just going into business for himself. Setup an LLC and is wanting to operate as an S-Corp.

I am getting confused. Now I know the company is an LLC... but since he is an lawyer does he not have to form an Corporation, 1120 C-Corp and be an Personal Service Corp?
Or is it do an LLC and choose your structure.

I know this applies to accounting, actuarial science, architecture, consulting, engineering, health, law, and the performing arts.

I suppose I should know this but the more I read the more confused I get.

Thank you
D

[mastertaxguy]

Attorney-personal service corp or s corp?

1. Code sec. 269A defines as Personal Service Corp as a corporation formed for which:
"the principal purpose for forming, or availing of, such personal service corporation is the avoidance or evasion of Federal income tax by reducing the income of, or securing the benefit of any expense, deduction, credit, exclusion, or other allowance for, any employee-owner which would not otherwise be available."
2. An S Corp passes through all income, either as wages or a distribution, to it shareholder(s). So there is not accumulated earnings or anything like that that is untaxed in the current year.
3. IRS Reg. 1-441-1 define a personal service corporation (for tax year determination purpoes) as
" (1) In general. For purposes of this section and section 442, a taxpayer is a PSC for a taxable year only if--
(i) The taxpayer is a C corporation (as defined in section 1361(a)(2)) for the taxable year"
4. I don't see a PHC or PSC issue here if the corporation is an electing S corp.
5. There will not likely be accumulated earnings, the S corp itself doesn't pay any income taxes (generally), and all items of income after normal business expenses/deductions etc. will be passed through to the shareholder(s).
6. TTB 18-16 discussed Personal Holding Companies.
7. Schedule PH(personal holding company taxes) is attached to Form 1120, NOT form 1120S.
8. There is no requirement than an attorney/lawyer, tax professional accountant, CPA, or any other licensed professional form a corporation. If he wants to be taxed like an S corp, he might be better off forming an S corp as an 1120S will have to be filed anyway.
9. Get your expected fees up front.

[geekgirldany]

Thanks so much again Tax Guy. I missed the taxpayer is an C-Corp.

[DaveinTexas]

Pllc

You may want to check with your State, it could be that if he wants to organize as an LLC the entity must be organized as a PLLC.

This shouldn't be a problem, he might have to hire an attorney though to merge the LLC with the PLLC Check out this link for further rigamarole regarding PLLCs: http://www.nolo.com/legal-encycloped...y-company.html

Then, he can elect S Status with the PLLC.

[buzzardbreath]

PSC Objective

Potential new client is an attorney just going into business for himself. Setup an LLC and is wanting to operate as an S-Corp.

The IRS objective in forcing a corporation to be a PSC is to deprive the owner of getting two sets of lower tax brackets. If he were a C corp, he could enjoy the personal benefit of having the first $60-$70K be taxed at lower brackets on his 1040, PLUS have lower tax brackets on his C corp for another $75K (numbers are approximate). And of course, he could control both levels via salary, etc.

The targets are only those corporations in which an owner only provides personal service, and the corporation is not investing in property, equipment, inventories, and receivables. IRS figures if the corporation were investing in these other things, there is much more involved in just personal service.

The original post says he wants to tax himself as an S-corp for his LLC. If he does this, the PSC does not apply since there is only one set of tax brackets anyway.