1120

[TAX]

My client is a Billing company for doctors. C corp.- Fiscal year 11/01/2004 - 10/31/2005
This is the only fiscal year client I have.

I told client to convert to "S" corp or he may pay PSC tax of 35% because he is in health care industry. Issues are very elementary but just wanted to confirm. I do one or two C crop returns.

I need to use 2004 tax law to prepare return. Please confirm? Return is due on 01/17/2005

I have financial statements prepared by company.

(1) They lease employees and pay fees

(2) They pay health insurance expense, 401k expenses etc. to leasing company

(3) Employee gifts - $148

I would deduct all of the above as "Other Deduction" on page 1 - 1120

(4) He has a loss of $1,900. Which I would include in RE (Unapproprited Line) on BS

Thanks!

[OldJack]

I told client to convert to "S" corp or he may pay PSC tax of 35% because he is in health care industry.

You might want to think about that S-corp status. Just because the business is associated with the medical field does not make it a PSC. It would appear that the shareholders/officers of the C-corp are not the ones providing personal service and therefore might not cause any problem with PSC status. I doubt a billing service would be classified as "in the field of health" service but of course one might say otherwise as that area is not clear in the law. If they convert to S-corp they would have to convert to calendar year unless they apply for IRS approval otherwise. Your shareholder/owners are probably going to lose some fringe benefits if they convert to S-corp.

Have they been filing as a PSC in the past?

I need to use 2004 tax law to prepare return. Please confirm? Return is due on 01/17/2005

Yes... the 2004 tax form would be used and most law would be that in effect for the year beginning 11/1/2004.

I have financial statements prepared by company.

(1) They lease employees and pay fees

(2) They pay health insurance expense, 401k expenses etc. to leasing company

(3) Employee gifts - $148

I would deduct all of the above as "Other Deduction" on page 1 - 1120

(4) He has a loss of $1,900. Which I would include in RE (Unapproprited Line) on BS

Lease employees could be treated the same as if they were regular employee but I agree I would treat those expenses as items for other deduction on page 1 but would attach a list of the items to the 1120.

Loss or profit is included in the amount of RE on page 4 BS. I always do the Sch M1 and M2 even if not required as it is a good proof to the corp financial statement and books and shows the IRS agent looking at the return that you have reconciled things which is what he/she would do on audit.

[rosieea]

I agree with Ol' Jack. I'd be surprised if a medical billing service fell within the purvue of Health Care for PSC purposes. Aside from possibly losing some fringe benefits, you should consider the problem of built-in gains which may result from the conversion. Since the C Corp is showing a negative RE account, you may not have E&P from the conversion, but you'll need to do the calculations.

[OldJack]

built-in gains tax

An excellent point Rosie. I overlooked that this morning with only one cup of coffee. Any built-in gains for assets (at conversion) later sold might be subject to S-corp tax (considering if C-corp E&P you are getting the old double tax) for 10 years after the S-corp election.

[Bees Knees]

The biggest built-in gains tax issue here would probably be the accounts receivables. If this is a billing company for doctors, that probably means payment is received based on a percentage of the doctor billings, which means lots of AR.

Accounts receivables would be built in gain property if the business reports the income under the cash method of accounting. You could cause built in gains tax to happen the very next month after the S conversion as AR is collected.

See the Doctor Jekyll example in TTB on page 19-11.

[TAX]

"Your shareholder/owners are probably going to lose some fringe benefits if they convert to S-corp"

Dear Old Jack: Thanks for youe detail response.

I don't know if fringe benefit is an issue as company is leasing employees. They pay "Fees" to leasing companies which include - complete payroll expenses, payroll taxes, 401k etc. and my client is deducting it on corp return. So even if it is Scorp he probably will deduct on S corp return.