Running two separate businesses through one S-Corp

[WhiteOleander]

I have a friend who has a tax preparation business. Has had it 30+ years. Quite a few years ago, he began another business. He has heavy road maint. equipment he buys and sells. He also does dirt moving, road work, demolishes old buildings. Hauls gravel and construction debris. That type of work. He does this mostly off season. He has reported all income expenses etc. for both businesses through the one S-Corp. He has not had any problems.
He has now been advised that he cannot report the income from two separate types of businesses in the same S-Corp. The losses from one would artificially offset the gain from the other. He pointed out that even if he reported them through separate S-Corps, it would still be on the same 1040 and would result in the same outcome.
However, he is concerned that perhaps this is incorrect and could cause a problem.
I thought that a Corp could report income/expenses from as many types as businesses as it chose.

Would be interested in hearing thoughts and opinions on this. Also, if it is against the code, a cite.

Thank you.

[Rapid Robert]

He has now been advised that he cannot report the income from two separate types of businesses in the same S-Corp. The losses from one would artificially offset the gain from the other. He pointed out that even if he reported them through separate S-Corps, it would still be on the same 1040 and would result in the same outcome.

Advised by whom?

If there are regular employees, I can definitely see why each business should be separate and have its own EIN. This would matter especially for state purposes (workers comp insurance, unemployment tax). Depending on the "reasonable compensation" for each business for the officer/employee, it is also possible that the employers share of FICA could exceed the annual max. for one employee, which would be incorrectly reported if all under one EIN.

I don't agree that the 1040 outcome would be the same regardless. I think you have to apply passive activity rules separately to each dissimilar activity. I think you need to determine reasonable compensation separately for each activity. I can also see why the IRS would like each activity to be reported separately, it makes it easier to look for outlying data and audit candidates.

However, I am not aware of any code or regs that require this. Technically, the Principal Business Activity Code on Form 1120S is based on the activity which generates the largest percent of total receipts, so you can have a single code for dissimilar businesses.

[WhiteOleander]

Thank you very much for your thoughts and insights. Those are all very good points. Some of them I hadn't considered.

Perhaps the word "advised" was the wrong term. There are several EA, CPA's and long time preparers that talk frequently and bounce things back and forth. This was an issue that was recently discussed.

[Snaggletooth]

Legal Problem

I'm not sure there is a tax code problem with this. Unless it is somehow a tax avoidance scheme, I think the IRS would be happy to not process an extra return every year.

There might be a legal problem with a corporation who (usually from inception) must state a functional purpose when it applies for a charter from the secretary of state. A lawyer might advise that a corporation who abandons its stated purpose may be putting itself at risk of being sued in some situations.

[Jiggers]

I never thought about this applying to an S or C Corporation, but during an audit of a farmer who also had a welding service, the auditor advised that the welding service be put on Schedule C, separate from the farming income on Schedule F.

I asked about some assets that were used by both businesses and some expenses that were common.

Seemed like a waste of time and would result in the same net income.

Not so.

Farmers use the 150DB method for depreciation. Others use the 200DB method. From a year-to-year, there is a difference, but over the life of the asset, there is no difference.

And a farmer, can use 75% business use of a vehicle without a mileage records (IRS Pub 225, though not an authority), but a pickup on Schedule C has to have mileage records.

Small businesses, not a significant item. Large businesses it is.

[Rapid Robert]

I think the IRS would be happy to not process an extra return every year.

I knew that the IRS budget has been severely cut, but first time I heard they might actually want fewer returns filed!

[Snaggletooth]

Believe It

I knew that the IRS budget has been severely cut, but first time I heard they might actually want fewer returns filed!

Fast Bob, I think a more valid statement would be they want fewer unnecessary returns filed. There are subtle differences as described above which could cause a net difference for one year, but unless there is a problem with losses exceeding basis and other rare distinctions, there would be no difference. Even the basis/loan basis problem can be avoided by equalizing capital application.

Trying to consolidate a Sch C and Sch F is a far more aggrevious transgression than mixing two lines of businesses on a corporate return. Indeed, many corporations have veered into other businesses and dropped their original. One example is Wickes Lumber, who veered into building supplies after years of manufacture of boilers.

[BOB W]

I have had this issue of 2 businesses operating under 1 corporation come up several times during my 45 years in practice. The one issue I always bring up besides the comingling of business types is RISK. By that I mean, If a law suit starts in one business all the assets of both businesses are at risk. Usually that is enough to stop or not start running 2 businesses under one corp. An option is to run a lean corporation with little or no assets in the corporation. But that may require 2 or more corporations anyway.

[TXEA]

I do not see a problem with two separate lines of business being operated under the same corporation or Schedule C if the lines of business complement one another. In the case of your tax preparer friend, I would not combine a tax prep business with a heavy machinery equipment business.

When I consider this issue for a client, I try and determine if there are certain synergies between the lines of business that make them inter-dependent. For example, if a small brew pub also offered a packaging service for sale of its product, I could see where the lines of business (though completely different models) would complement each other and would probably not distort income for either on the same return. In fact, separating the costs of what beer was sold on-site and what was packaged, and which personnel were used to pack versus to serve would be difficult to determine. It might be easy to track revenue by line, but expenses would prove difficult.

Other examples where combining makes sense:

Tax preparer that engages in financial planning
Real Estate Agent that is also a fee appraiser
Lawyer with a Title Company
Bakery with a small café
Grocery store with a deli
Auto Repair shop with a few used cars for sale


With your tax preparer friend's two lines of business, the nature of the heavy equipment business clearly provides no complement to the tax prep business, and could in fact distort the income of the CPA practice. I would not report these two businesses on the same tax return.

[jsamans]

The problem isn't with the IRS.

There's nothing wrong with combining more than one line of business under a single entity for tax purposes. The problem with doing this is more practical than legal: as TXEA points out, some lines of business are naturally aligned, and others can be stretched to fit, but insurers typically will not write liability policies that cover drastically different lines of work, because there's no realistic way to estimate the risk.

The point is, a construction business can employ accountants and do its own taxes within scope of its work, because the tax activities are organic to the business, but a single company can't typically sell unrelated services across two totally different sectors (such as accounting and construction) and still get insurance. Construction generally requires insurance, so I'm wondering how this is covered in the case you mention; is the owner getting policies from different insurers and not telling each one about the other, maybe? (I think that's illegal.)

For a direct example, I'm part of a worker cooperative that is taxed as an S-Corp and provides a whole range of consulting services, including business, marketing, and technical consulting as well as academic tutoring. Each member has his or her own specialty, and this wasn't a problem for insurers, who just added appropriate endorsements for each line of business for general and professional liability. However, when one member wanted to pick up some work his father had previously done fixing drywall and doing touch-up paint to refresh apartments, the insurers all say "no way."

The cooperative ended up creating a wholly owned subsidiary LLC just for that purpose -- which, as a disregarded entity, reports profits and losses on the same books as the parent company and is covered by a single tax return, but which is a separate employer for state law and has a distinct sphere of liability.

Of course, administering such an arrangement adds complexity. It may be easier to have two unrelated businesses and just file the two separate returns! :-)