Disregarded Entity to Corporation (S Corp)

[HeidiDetail]

Client- Sole Member LLC (Disregarded Entity) late election in August 2020 accepted by the IRS in November 2020 effective 01/01/2020 The owner did their own bookkeeping through QB's Online. The Owner hired QB's online Accounting to clean up file for Jan-Oct 2020 (basically reconciled bank accounts via bank statements). Any discrepancies were accounted for in an Equity account titled "Bank Reconciliation Discrepancies.

The owner had been using QB's for 2018-2019 as the disregarded entity and never reconciled any bank accounts.

The Retained Earnings at YE of 2019 were approximately $100,000. I created a JE to move 2019 Retained Earnings into the value of Common Stock. The reconciliation adjustments were approximately <$40,000>. I want to move that amount to Common Stock as well. Is that appropriate?

Additionally, two other Equity accounts were added totaling $22,000; I created a JE and combined them into one "Shareholder Capital" account. This is the amount the owner's deposited throughout the year to keep the bank account afloat. In addition to the tractor-trailer worth $9,120 (original Cost $20,000 less accumulated depreciation).

Net Income at YE 2020 is $71,000; Shareholder Distributions are $127,000. They paid no salary because the S-election was accepted so late, and the owners had not acquired any advice from an accountant. They had only one Shareholder until 2021: now there are four, and they are paying salaries.

Are the JE's appropriate, according to research in TTB? The Tax Book discusses this situation on the bottom left of section-page 20-22 and also refers to section-page 8-5 and18-5.."

[TaxGuyBill]

Shareholder Distributions are $127,000. They paid no salary because the S-election was accepted so late

I realize this isn't your question, but salary WAS taken. "Reasonable Compensation" is not optional, it is required. What happened is they took the required compensation, but failed to file payroll forms. So they should now be filed. And part of the requirements for the late election is that they had intended to be taxed as a S-corporation at the beginning of that year, which would mean payroll. So receiving a late acceptance is not an excuse for not filing payroll forms.

I'm not any good with the bookkeeping side of things, so I'll leave that for somebody else to answer.

[HeidiDetail]

Thank you so much for the response; much appreciated!

I read somewhere in my research the IRS "frowns upon" the salary issue (meaning not having taken any). Maybe it was referring more to the FMV of wages for the position. I thought as long as Distributions did not exceed Shareholder Capital + Retained Earnings + Common Stock, the IRS would be okay, and it is their first year.

Can the Shareholder take all salary in the 4th Qtr. of 2020?

I could sure use some help on the accounting part if anyone has some thoughts.

[HeidiDetail]

Thank you so much for the help! Drake software, this Forum, and TTBs' Message Board are invaluable tools. I certainly wish I had started this last year!!! I read a lot last night and this morning. I looked up many references throughout and found a few answers.

One paycheck in December should suffice. The IRS' letter is dated November 23, 2020; not to mention, SMLLC cannot take wages.

Three other trucking colleagues of my client recommended another tax accountant. This gentleman convinced them he "is an expert in the highly-specialized trucking industry" and is charging them $500/month for accounting services; he isn't even doing payroll; they hired a payroll service. I think that's a bit excessive. Any opinions?

The advice from you is well-regarded, thank you again.

[TAXNJ]

Three other trucking colleagues of my client recommended another tax accountant. This gentleman convinced them he "is an expert in the highly-specialized trucking industry" and is charging them $500/month for accounting services; he isn't even doing payroll; they hired a payroll service. I think that's a bit excessive. Any opinions?

The advice from you is well-regarded, thank you again.

Not if accounting vs. bookkeeping services, (not including bookkeeping?), for all three three trucking companies. Much depends on the type of accounting services provided.

Some accounting firms may not provide “payroll” services which could be time consuming and might be more economical for clients to use a payroll service.

[TaxGuyBill]

One paycheck in December should suffice. The IRS' letter is dated November 23, 2020; not to mention, SMLLC cannot take wages.

Three other trucking colleagues of my client recommended another tax accountant. This gentleman convinced them he "is an expert in the highly-specialized trucking industry" and is charging them $500/month for accounting services; he isn't even doing payroll; they hired a payroll service. I think that's a bit excessive. Any opinions?
.

The date of the IRS letter means nothing. As I mentioned before, in order to qualify for the late election they must have been treating it as a S-corporation as of January 1st, 2020. So if they were treating it as a S-corporation and assuming they took money out of the corporation, that is Wages. Yes, I realize some tax preparers "cook the books" by saying it was a loan or whatever and then do it all of the payroll in the last quarter, but personally, I'm not going to falsify bookkeeping just so a taxpayer can reduce some penalties.

As was noted above, the $500 a month really depends on what services (and time) is provided. It could be reasonable, it could be excessive, or it could even be low.