C corp by default

[oceanlovin'ea]

One of the new clients I inherited from a friend who has retired from the tax business is a lady who does painting. She and her boyfriend incorporated in November 2005. She sent in the election to be an s corp in Oct of 2006 and requested s status back to Nov 2005. They sent her back a letter stamped Oct 30,2006 and said she could start the s corp as of 1/01/06. They sent the 2553 back to her because she and her partner did not sign where the officers are supposed to sign. She took this to the other accountant, BUT the other accountant never did anything with it. When she brought the files to me last weekend, I found the letter. I called IRS yesterday and the election can start 1/01/07 now. I can't go back to 2006. Time has expired. So I will have to do the return as a c corporation for 2006. That is going to hurt her BAD.

I have only done 1 c corp before and it has huge losses every year. I read what is in the TaxBook about corporation returns. I want to make sure that I am doing this correctly. I don't want to make matters worse for her.

She had gross income of around $25,000 and expenses brought it down to net income of around $14,000. She has to pay corporate tax of around $2000 on that money. Then you deduct the corporate tax paid from net income. She is a CASH basis business. I mean totally cash basis - no bank account. So all the profit would be considered a distribution. Is that correct? So the distribution would be around $12,000.

That will mean that she will have to pay a couple hundred dollars of personal income tax.

Am I figuring this correctly? Am I missing anything?

Thanks for your help.

Linda F

[Vgene]

Try again

I believe you have a valid reason for the late filing of the 2553. You have a client dependent upon a tax professional that let them down. Take a look at Rev Proc 2003-43 it gives some guidelines for late filing. (If you use Lacerte, a Rev Proc entry section is available as part of the regular 2553 application.) We have had excellent success in filing way late for various reasons under this Rev Proc. Do not take what some IRS representative said on the phone as the final answer.
Good Luck

[oceanlovin'ea]

How would I do that? I faxed the completed 2553 and the statement of reasonable cause this morning to the person I talked to yesterday.

Do I write another statement of reasonable cause? Do I fax that one to the fax number or just mail it in to Ogden?

I appreciate your help. I really would like to be able to file an 1120S for her.

Would I go ahead and file the 1120 so that there would be no late penalty? Then amend if we get the approval.

Linda F

[BOB W]

If you are unsuccessful with the S election you may want to file as a sole proprietor. My reason is simple, they did not act as a corporation ( no corporate checking account). A lawyer would pierce this corp easily.

You could just file as an inactive corp and use the current S corp approved date going forward. But you should require that a corp checking account be set up and that ALL activity be processed through that account.

If they refuse to open an account, I (me) would tell them good-bye. There is no way to verify the activity of this Corp.

[oceanlovin'ea]

move this up

I just wanted to move this up to the top. I have to make a decision about this return today. Actually by 3 pm, if I am going to file electronically.

Should I just go ahead with corporation return and go back and amend if they will allow the s election to be effective in 2006?

Linda

[JohnH]

Why Put Yourself Under Pressure?

There's no reason you need to restrict yourself to 3pm today.
You can paper file as long as it's postmarked by the end of the day on Monday.

You could file the C-Corp return but still pursue the S-Corp election if you want to. If it's subsequently approved then you could amend the corp return and personal returns to set things right, although by the time you do all that your fees for amending are going to eat into what's probably a net wash in taxes between all the returns. Unless there's some overriding reason that you need the S-cop election to be effective from day 1 (and there could be some), the client might be better off just letting the S-corp election become effective whenever all the details are sorted out.

Incidentally, the corp tax the client will pay on the C-Corp income is close to the FICA/MED she would have paid on a reasonable salary from the S-Corp had she reported things properly, so the corp income tax isn't such a big deal IMO. Plus, if it's an S-Corp, a really difficult auditor might just choose to reclassify some or all of the income as salary/wages and assess penalties & interest for late-filed paryoll reports. All this could be much more expensive than the $2K in corporate income tax.

In any event, I totally agree with the recommendation that you insist they open a bank account & function like a normal corporation. Otherwise they are playing with fire & just creating headaches for you.

[Bees Knees]

See TTB, page 19-4 for several possible ways to get a late S election through IRS, even for all back years.

Another method is a way I heard yesterday at a seminar by Bob Jennings through the Minnesota CPA Society in Bloomington. He visited the IRS processing center in Cincinnati a few years back and they showed him some idiot letters sent in by taxpayers and tax preparers requesting dumb stuff.

One letter was from a tax preparer requesting IRS to grant the S election on a late filed 2553. The IRS denied the request. The tax preparer sent the exact same letter two weeks later to the same service center requesting IRS to grant the S election, hoping a different IRS employee with a heart would grant the request. The letter was stamped denied. The tax preparer sent the exact same letter again a few weeks later to the same service center requesting IRS to grant the S election. The letter had a note attached to it from some IRS employee saying this idiot won’t stop writing letters until we grant his request. The Form 2553 was stamped approved.

If all else fails, just keep mailing the same letter over and over again until they approve your late S election.

[oceanlovin'ea]

Thanks

for all your suggestions. I was just trying to be able to electronically file this return for her. So I needed to get it filed by this afternoon. But I do need to talk to her again.

Bees Knees, I just might try sending it in and seeing what happens. Won't hurt.

This and another client I inherited from a friend who now has full time job and new husband and retired from side jobs. Both these people are painters. They were just regular old sole props until they had to incorporate in order to get their workers comp exemption. Now they have to do corporate tax returns and follow rules that they can't or won't follow. One can't get a checking account anywhere. He owes Bank of America money and he is mad at them and won't pay them.

Both of them work to pay their rent, insurance, phone bills and gas. Then they drink up the rest. (At least that was what I was told). They are not business people. They do keep their receipts and for that I am grateful.

I explained to one about reasonable compensation and paying payroll taxes. I told him how he could pay a certain amount each month. I will have to give him coupons to take to IRS local office to make his payment. But I told him that it would put him in compliance now. He can beg ignorance for past sins. I told him it was for his protection too. Retirement or disablitiy will not be an option for him if he doesn't pay in to SS. So I think he is willing.

I would imagine that there are many people like that out there. Maybe that is one reason balance sheet is not required for these small businesses. They don't keep books.

I will try to get them compliant to the best of my ability and explain the ramifications if they aren't compliant. I will probably write up a letter of engagement for these people so that I am protected if audit situation arises.

Everyone must have been working hard yesterday. There was not hardly any action on the board.

[Luis Mopeo]

She is a CASH basis business. I mean totally cash basis - no bank account.

You may want to read "Paying Expenses of an Employer" on page 8-13 of TTB. If these folks have been paying corporation expenses out of their own pocket, they might lose the deduction altogether.

"If the expense paid by an employee is that of the employer and not the employee, the expense might not be deductible. This could be the case where a taxpayer is both the shareholder and employee of his or her corporation..."

I question whether they were operating as a corporation. Were there ever any capital contributions made? No bank account, so checks are made out to them personally? How did they pay for their paint and supplies? Personal checking account?

One of the main things that makes a corporation a corporation is separation of funds. Just because you file articles of incorporation with the state doesn't mean you can later pick and choose which activities you engage in that are corporate activities. If they were operating as sole proprietors, then filed for incorporation, but continued to operate exactly as they had before, I just don't see the corporation as anything other than an empty shell at this point.

[BOB W]

You may want to read "Paying Expenses of an Employer" on page 8-13 of TTB. If these folks have been paying corporation expenses out of their own pocket, they might lose the deduction altogether.

"If the expense paid by an employee is that of the employer and not the employee, the expense might not be deductible. This could be the case where a taxpayer is both the shareholder and employee of his or her corporation..."

I question whether they were operating as a corporation. Were there ever any capital contributions made? No bank account, so checks are made out to them personally? How did they pay for their paint and supplies? Personal checking account?

One of the main things that makes a corporation a corporation is separation of funds. Just because you file articles of incorporation with the state doesn't mean you can later pick and choose which activities you engage in that are corporate activities. If they were operating as sole proprietors, then filed for incorporation, but continued to operate exactly as they had before, I just don't see the corporation as anything other than an empty shell at this point.

That was exactly my point on my previous post> he/she is a sole proprietor????????????????????????????

[oceanlovin'ea]

I agree with both of you. They don't have the knowledge or the incentive to learn how to operate a real business. They just work, get paid, pay bills. The old accountant told me today that she is an alcoholic. So I don't think you will ever change her.

I think they usually get paid in cash or go to bank and cash checks.They may even ask to get paid in cash.They have their invoices that they give to the customer.

No they really don't operate as a corporation. I am sure they would consider the money they get as corporation money and after they cash the checks it is their money. No - probably the lady doesn't even know the difference as to what a corporation is. I told the other guy that the corporation is a entity. He is not the corporation. He works for the corporation. I don't think he knew the difference but he understood. But I don't think he will ever do all that he should do.

I think that is probably a good question to ask the powers that be.

[Roland Slugg]

My 2¢ worth

I agree with those who've said that since the woman and her boyfriend have not respected the corp's separateness or even its existence, the business they operate should not be treated as the corporation's. I say "they" operate, but the original post says that it's the woman's business. The boyfriend's involvement was not stated, I don't believe.

If the woman were my client, I would advise her to report the income on Schedule C and ignore the corporation. It doesn't appear that the corp serves any significant useful purpose, and I can't help but wonder why it was created in the first place.

[thomtax]

Different deadlines?

There's no reason you need to restrict yourself to 3pm today.
You can paper file as long as it's postmarked by the end of the day on Monday.

.

Is there really a different filing deadline for electronic filing and paper filing?

[ecb34691]

Llc

Linda, since you are in FL and many of these types became corps because of workers comp, you might suggest they become an LLC (much cheaper annual state fee & they can still get the workers comp exemption) and do a sch C and not have to do corp and personal. Had many over the last couple of years "un-incorporate" just for this reason.

[JohnH]

Good discussion

After reading the excellent posts on this subject I've got to say I need to bow to the wisdom of others and agree that Schedule C is the best way to handle this situation, treating the corp as never having been properly organized or perfected. I'll bet they don't have any organizational munutes, by-laws, etc - nothing but a charter.

But if you do decide to stick with the corporation this takes you back to the question of cost, since the S/E tax is roughly the same as the corp income tax. In that case, I'd still be inclined to forget the S-corp for 2006 & just file as a C-corp.