LLC S Corp Election

[S T]

2 LLC's were formed by husband and wife 2/16/05, one for Rental Real Estate (1 property) and the other for the wife's small business ($15,000 gross receipts or less per year). Real Estate has been transferred, and wife is receiving income in the LLC name.

All paperwork was handled by an Asset Protection/Entity Service which filed
form 8832 entity classification along with form 2553 S Corp election. I just received the Operating Agreements and IRS acceptance of S Corp election. Better now than in April, 2006!

It seems like it might not be in the taxpayer's best interest to file as an S Corp on either the rental real estate or the wife's business.

Question, does anyone know if the 8832 entity classification can be changed back to LLC (disregarded entity) and revoke S Corp election for 2005?

Sandy

[Black Bart]

Sandy,

I don't know about the S corp, but try this: print out form 8832 and the instructions from Google. On page one, question 1-b, there's a box to check that says "Change in current classification."

On page two under "Purpose of Form" in the third paragraph under "60-month limitation rule," it further states," Once an eligible entry makes an election to change its classification, the entity generally cannot change its classification by election again after the effective date of the election..."

Although that's a "negative" confirmation (if you can call it a confirmation), it seems to imply that if you did want to change class before the [i[effective[/i] date, then you could.

???

[S T]

Form 8832

Hi Bart, yes I read the instructions and was on "google" for a lot of time today trying to research this.

I think I came to the conclusion, that once LLC elected S Corp treatment, that maybe you couldn't change for 60 months. Your conclusion seems to be the opposite (I hope so).

So I guess you and I will wait to see what the other feedback is.

I do so appreciate your input.

Sandy

[Armando Beaujolais]

Regulation 1.1362-2(a)(2), "When effective."

"...a revocation made during the taxable year and before the 16th day of the third month of the taxable year is effective on the first day of the taxable year and a revocation made after the 15th day of the third month of the taxable year is effective for the following taxable year."

It looks like you have to file as an S corp this year.

[Black Bart]

There's a

"know it all" in every crowd (although, mighty helpful indeed).

[Lion]

S-Corp

Hi, Sandy,

A new client came in and told me that she's an LLC. After getting her to bring in her paperwork, I learned that one of those Delaware firms organized her as an LLC to be taxed as a partnership -- listing one and only one member. She was intent on staying one member. It was still during her initial year, so I wrote a letter informing the IRS she was only one member and asking if they could dissolve her partnership in their records, cancel its EIN, and issue her single-member LLC a new EIN. They wrote back that they had changed their records to reflect that her LLC was actually a single-member disregarded entity and to use the current EIN when filing her Schedule C. Now, I realize that this isn't the same situation you have. But, my point is that since it's still their first year, I'd try calling or writing the IRS to explain that a lawyer had filed paperwork on behalf of your clients that did not reflect their true intent and what's the simplest and quickest way to get them into the entity they really mean...blah, blah, blah. It's worth a phone call. If it works, it'll be much faster than filing an S-corp. and then dissolving it. I'd really try to deal with this before filing their first tax return. Good luck.

[S T]

LLC and S Corp election

Thanks Lion, this was my thought exactly! Since they created the LLC in 2/05 and the year end is not here yet and the "wonderful" organizers of creating Entities, Asset Protectors, etc (or whatever you would like to call them) filed for the S Corp election, to contact IRS and try to revoke before the 1st tax year ended.

I think it is worth a try. Like Abby stated in a prior post we have all different kinds of excuses and statements to elect S corp elections late, , why can't we invoke ones to "opt" out of, if the taxpayer relied on someone else's advice.

So I am off to the Tax Practioner's Hotline first to see what they say, then will probably send off the entity classification change next and a revocation of the S corp election, next all before year end.

I hope it works!

Unfortunately I do believe that all of us tax professionals will be faced with more situations like this. Our taxpayers think they are doing the right thing for their financial future and believe the information that they are receiving from all of the Asset Protection Groups, Real Estate "Make a Quick Buck" Group, etc. So these groups are reaping the benefits, while our clients get stuck with the tax ramifications!

Any more thoughts?????

Sandy

[Armando Beaujolais]

I agree. It's worth a try. There's nothing to lose, and a lot to gain.

It's a different situation with switching from a partnership to a disregarded entity. For one thing, if there was always only one owner, a partnership never existed in the first place. Also, the taxation is generally the same for a partner as a sole proprietor.

From a theoretical standpoint, the IRS might be (should be) reluctant to allow retroactive changes in business entity because that would allow businesses to wait until financial results were in before choosing the most tax-favored form of business.

However, a phone call or letter sure won't hurt, and you never know.

[Gretel]

Would do same thing

Sandy, I would do exactly would you suggested. If you get a person, which still uses common sense it should work. Good luck for that and please let us know.

As far as these "big-bug-maker-better-watch-out-not-to-find-yourself-in-prison" go I totally agree with you and have a hard time not just being mad. I certainly consider putting a bigger price tag on work I have to do to get my client out of hot waters again.

A lot of people spend their money everywhere and start crying about a low bill from an accountant.

[S T]

Update on LLC and S election

Well I called the Practioner's Hotline today, and was fortunate enough to contact a very willing and concerned Rep. The second I explained the situation and that an Asset Protection Group had prepared the LLC and filed for the S election, she said "Oh Dear" you do have a problem. Gave the indication that this is not the first time some one has called about these types of issues.

Anyway in talking with her and her speaking with the Entity Section, there does seem to be a ray of hope. I was advised to send in form 8832, Entity Classification Election, indicate partnership, and a letter signed by the members, requesting the revocation of the S election and to include that it was the first tax year, no returns filed, erroneous advice and that the taxpayer did not understand the tax implications of making the S election. Send all to Philadelphia for processing and hopefully a favorable outcome.

So now on to the paperwork quickly, as I would like to try to receive this acknowledgement by 12/31/05.

Sandy

[Armando Beaujolais]

Sandy, I would do exactly would you suggested. If you get a person, which still uses common sense it should work.

Huge.

So much is dependent on finding a real person to talk to who is in the loop and can help you.

Develop business relationships with those real people you talk to. They're just as appreciative as you are when they have someone knowledgable and professional to talk to. They're usually anxious to give you their number and encourage you to call them to ask them questions. Such an asset.

[Armando Beaujolais]

S T

Keep us posted on this one. Just like regular tax and AMT running parallel, the "by the book" and practical reality run parallel dealing with the IRS. There are a few students watching closely to see what happens here.

Good work.

[S T]

So True

Huge.

So much is dependent on finding a real person to talk to who is in the loop and can help you.

Develop business relationships with those real people you talk to. They're just as appreciative as you are when they have someone knowledgable and professional to talk to. They're usually anxious to give you their number and encourage you to call them to ask them questions. Such an asset.

This is exactly what I did, when the Representative was so nice and helpful on the phone. She kept apologizing why she put me on hold while she was seeking a solution to the issue, and the best way to help and address the situation. Over a 45 minute conversation we exchanged kind words and phone numbers and the insight that she provided will hopefully be of help in this situation.

I will let you know the outcome.

Sandy

[abby]

too soon for champagne, but...

It may be too soon for congratulations, but I'm always heartened when I hear that a rep listens to the actual predicament and tries to find a real world solution.

And, Sandy, may I say, your clients are lucky to have you.

[S T]

Time will tell

A big thank you to all who posted on this subject and all who post on this forum. Responses and thoughts were helpful in deciding a plan of action.

Of course it will remain to be seen what the outcome of this will be.

Sandy