New client Corp question

[John3cpa]

New client who is an anethesia nurse has been filing as a C Corp with a 5/31 FY. Numerous problems-using graduated tax rate rather than PSC 35%, don't know if FY was approved by IRS, no salary to 100% owner, overstated rent expense for home office, etc. I don't know how returns like this get by...anyway, she wants to "let sleeping dogs lie" but "do it right" going forward starting with a cal year SubS for 07, salary, reasonable rent, etc. However, she and her husband who is an independent engineer who previously filed as sole prop want to form one SubS for both businesses. I have only seen small business returns prepared for separate lines of business, not combined like this.

[Luis Mopeo]

What's wrong with this picture?

"do it right" going forward

They're going to straighten up and fly right, and the first step is saying that combining a medical practice and an engineering practice forms an appropriate economic unit?

They've ignored proper reporting in the past, and it looks like they have no intention of proper reporting in the future, maybe with some lip service thrown in to grease the wheels.

The bank robber, "I'm never going to rob a bank again, I see the error of my ways and I'm going straight. Could you turn in here to First National? I just need to sneak in quick to...make a withdrawal."

I don't mean to be cynical, but this is one where I'd be very curious as to why these folks are no longer with their old preparer.

[OldJack]

However, she and her husband who is an independent engineer who previously filed as sole prop want to form one SubS for both businesses. I have only seen small business returns prepared for separate lines of business, not combined like this.

If the taxpayers want to "let a sleeping dog lie" it is their decision and not for you to be concerned unless it makes your preparation of current or future tax returns incorrect. You can make most accounting changes now days without IRS approval but if needed IRS usually gives approval.

An S-corp can generally operate more than one business activity as long as it is a legal activity. Unless the activities are passive activities you do not have to keep separate activity records within the corporation. Therefore, there is no reason that the two activities cannot be conducted with one corporation unless the charter of the corporation has some unusual restriction to a specific activity. You might suggest a new corporation for the S-corp and liquidate the old C-corp just to make the new one clean. Of course if the liquidation of the C-corp would cause a big tax you might just keep it and file the election for S-corp status.

[Luis Mopeo]

You might get by with filing both separate businesses under a single business entity, but it's a bad idea.

It sounds like the filing for the medical entity has been a mess. Why would you want to throw the separate engineering business into the muck? You can't just hope things will turn out right. You have a fiscal year on the medical business and a calendar year on the separate engineering business? Are you going to apply to change the medical to a calendar or the engineering to a fiscal?

I guess you could just pretend and hope for the best, but I wouldn't recommend it.

It sounds like one of two things. Either the clients are (1) too disorganized and/or uniformed and have made an innocent mess of their returns, or (2) have purposely created a pretzel for purposes of tax avoidance. If it's (1), it's not a good idea to give them a third entity to intermingle funds with, and if it's (2), you don't want to be an unwitting participant.

I'd be real careful with these folks.