C to S Corp, etc.

[rfk]

Hi folks,

My first S Corp. The theme: client was C corp for 2004 tax year. Become an S corp in 2005. There was a loss in 2004 for the C corp of approx. ($65k). This tax year (2005), it is about ($95k). Assets at the end of 12/31/2004 were about, line D, of 1120 $261, 929; this year it is considered $0 because of being less than $250k. I hope I have not missed something for proper answers to my questions.

Question(s):

* Is there going to be a "built-in cap gain" issue for this company since they went from C Corp to S corp? Or is this when the company is actually sold?

* Loans from S/H's on 2004 return shows (Sched L) $322,146; is this going to affect any taxation issues?

* What would be the actual effective date of S Corp election? When the 2553 was filled out and presumably filed, it asked for an effective date of 01/01/05; it was signed on 03/08/05. I can't talk to the IRS about this; no POA. What would you suggest?

* Any thing else that you folks can think of would be greatly appreciated for finalizing this return.

Thank you very much for your help!

Ray

[OldJack]

Hi folks,

My first S Corp. The theme: client was C corp for 2004 tax year. Become an S corp in 2005. There was a loss in 2004 for the C corp of approx. ($65k). This tax year (2005), it is about ($95k). Assets at the end of 12/31/2004 were about, line D, of 1120 $261, 929; this year it is considered $0 because of being less than $250k. I hope I have not missed something for proper answers to my questions.

The fact that assets do not have to be reported on the 1120 because of the amount does not change the fact that the corp has assets subject to the built-in-gains tax.

Question(s):

* Is there going to be a "built-in cap gain" issue for this company since they went from C Corp to S corp? Or is this when the company is actually sold?

Yes/No.. All $250,000+ assets must be valued at FMV for later taxation (includes off the books assets such as receivables) when disposed of unless held more than 10 years. The Built-in-Gain is a C-corp type tax on the S-corp tax return in the year when "each" of the assets are sold or disposed of subject to C-corp taxable income at that time. If the S-corp is liquidated before 10 years all the built-in-gain is subject to tax as a C-corp asset (double tax) and again as the gain flows through on the S-corp k-1 to the shareholder 1040.

If any of the C-corp assets on 01/01/05 were sold or disposed of in the year 2005, then you have a built-in-gain calculation for the S-corp and possibly a S-corp tax to pay.

* Loans from S/H's on 2004 return shows (Sched L) $322,146; is this going to affect any taxation issues?

Yes, it gives the shareholder basis for deducting S-corp losses. Any C-corp losses are suspended as long as the S-corp status is valid.

* What would be the actual effective date of S Corp election? When the 2553 was filled out and presumably filed, it asked for an effective date of 01/01/05; it was signed on 03/08/05. I can't talk to the IRS about this; no POA. What would you suggest?

If the IRS approved the election, the S-corp beginning tax year is 01/01/05 and the other dates are immaterial.