LLC electing to be taxed as an S Corporation

[Unregistered]

What rules apply when you have a company that is LEGALY an LLC but is being TAXED as an S Corp. For example when it comes to presentation on financial statements, do you use retained earnings, common stock, etc.? Also in regards to benefits, can a company have a medical reimbursement plan in which the spouse of the owner is covered? Or is he/she deemed self employed as well (as with an S Corp.)?

Thanks in advance.

[Armando Beaujolais]

What rules apply when you have a company that is LEGALY an LLC but is being TAXED as an S Corp. For example when it comes to presentation on financial statements, do you use retained earnings, common stock, etc.? Also in regards to benefits, can a company have a medical reimbursement plan in which the spouse of the owner is covered? Or is he/she deemed self employed as well (as with an S Corp.)?

Thanks in advance.

Assuming you're not using GAAP accounting for the financial statements, setting up the books as an S corporation would be the most straight forward. You have to reconcile the balance sheet to the tax return anyway. Unless you're setting up the balance sheet for some other specific reason, you might as well do it as an S corp from the start.

Good question on the medical reimbursement plan for the spouse. Revenue Ruling 71-588 (TheTaxBook page 5-11) allowed the arrangement for a sole proprietor. In reading the ruling, the case was about a sole proprietor, but the decision didn't say that it applied only to sole proprietors. I don't see any reason why it wouldn't apply to S corps as well. Google 71-588 and take a look.

[JON]

1120s

If you have an S Corp spouse of a 2% or more shareholder has the same restrictions for employement benefits as the shareholder. I think you are trapped and spouse is not an eligible participant in such plans in the S Corp. If you elect to be treated like an S corp you are treated like one...

[John of PA]

S Corp Equity

Your question of presenting the equity of an LLC that elected S is interesting. I would present on the Balance Sheet Equity; the terms Members Equity (not Retained Earnings), and Members contribution or members draws (and stay away from the word shareholders). Also I would stay away from GAAP presentation unless you have to, as your just opening up a whole lot of needed adjustments (such as 179 ded).

[Bees Knees]

JON is correct

Good question on the medical reimbursement plan for the spouse. Revenue Ruling 71-588 (TheTaxBook page 5-11) allowed the arrangement for a sole proprietor. In reading the ruling, the case was about a sole proprietor, but the decision didn't say that it applied only to sole proprietors. I don't see any reason why it wouldn't apply to S corps as well. Google 71-588 and take a look.

Section 1372(b) defines a "2-percent shareholder" as any person who owns (or is considered as owning within the meaning of section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all stock in the corporation.

Section 318 is the constructive ownership rules of stock, and under Section 318(a)(1), the stockholder’s family members, such as the spouse, children, grandchildren, and parents, are all considered to constructively own stock in the corporation. So therefore, the spouse would be treated as a 2% shareholder and could not receive the same benefit that a spouse of a sole proprietorship can receive.

The reason it works for a sole proprietor and a partnership is because Section 318 only applies to constructive ownership of stock.

[ChEAr$]

Equity presentation

I'll second the notion of John of PA regarding balance sheet presentation.

On the S Corp tax return of course, original contributions by members I show on the 1120S as paid in capital with zero common. All earnings/losses get shown on the 1120S as retained earnings

However if I had to prepare a balance sheet for FR purposes, Everything would be "coagulated"
(congealed?), ... consolidated! into "Members' acconts".

ChEAr$,
Harlan Lunsford, EA n LA