C corp by default

[BOB W]

How would they go about doing that? Do they need to contact their workers comp carrier and tell them they are an LLC instead of a corporation?

Then they would dissolve the corporation and set up an LLC, which would result in filing as sole proprietor on their tax return.

That would solve a lot for them.

The lady and her companion are partners. She is 90% and he is 10% owners of corporation. If they become LLC, they would just divide the income and expenses by the same percentages, wouldn't they? Or however they choose.


Linda F

File as a Partnership. This will give you 'till October 15 to file, although no extension was filed. But there is no penalty for this, although you may get a penalty notice that can be recinded. File the C Corp tomorrow, zeros. LLC is not posible at this time.

[oceanlovin'ea]

ecb34691

How would they go about doing that? Do they need to contact their workers comp carrier and tell them they are an LLC instead of a corporation?

Then they would dissolve the corporation and set up an LLC, which would result in filing as sole proprietor on their tax return.

That would solve a lot for them.

The lady and her companion are partners. She is 90% and he is 10% owners of corporation. If they become LLC, they would just divide the income and expenses by the same percentages, wouldn't they? Or however they choose.

I didn't know that you could be an LLC and still get the workers comp exemption. I have another young couple that do cleaning of new construction houses and they just incorporated because of the workers comp issue.

Thanks so much for your help and knowledge of this area.

Linda F

[BOB W]

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.<<<<<<<<<<<

Yes, I have run across that choice as well but I have always decided to get something for the bucks being spent and chose to pay into SS for the credit down the road as apposed to the buck going to "Nothing"............

[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.

[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.

[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?

[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.

[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.

[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????????????????????????????

[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.

[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.

[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.

[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.

[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

[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.