Discussion:Converting S Corp to C Corp
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Converting S Corp to C Corp
| 26 October 2006 | |
| I have a client that wants to convert his S Corp to a C Corp. Is there a form to revoke the S Corp Status? Or do I just send a request to the IRS with the 1120S? I want to convert using a Jan 1 conversion date to avoid having to file two short year tax returns. I believe I can elect to use a prospective date for the election to be effective. Any help is really appreciated. | |
| 26 October 2006 | |
| Best I can tell, I just attach a statement to the return with the appropriate signatures.
And if I want to use jan 1 I must file the statement by March 15 of the tax year. Am I missing anything? | |
| 26 October 2006 | |
| Check 1362(a) which gives you the specifics as to what needs to be included in the letter of revcoation -- Remember there is a 5 year wait before the Corporation can make another S election. | |
| 24 May 2007 | |
| I have a client of "service business" S corp with retained earning $200,000, A/R, $200,000 and A/P 600,000 with fixed assets worth $50,000.
What is the benefit of converting S to C corp? Pjoo, CPA in California. | |
| 24 May 2007 | |
| JR1
Why is it, other avoiding double taxation? Client is reaching gross service revenue about 3MM a year? Pjoo | |
Chautauqua (talk|edits) said: | 25 May 2007 |
| You have to explore the reasons why the client wants to do this, and then be satisfied that the reasons are sound. Otherwise you are not fulfilling your professional responsibilities. | |
| 25 May 2007 | |
| The s corp has tax benefits. If you don't want to show the corp income on the personal return you can do it. However the c corp pays income tax and then the dividends are also taxable.
I see no benefit to do this. Why does the client want to do this? | |
Corptaxhelp (talk|edits) said: | May 25, 2007 |
| Paul, is your client considering a public offering? If so, that would be a good reason to revert to a C corporation. The mechanics are fairly simple. I'd just be careful that a conversion is what is needed. | |
| 28 May 2007 | |
| Pjoo, make sure your client doesn't have some cockamamie idea about reincorporating in Nevada or Wyoming and avoiding state income tax on the corporate-level income. It won't fly.
For a service business, a C corporation may be OK because there is little or no net income at the corporate level after the stockholder/employee's salary is deducted. So the double taxation is limited or nonexistent. However, why bother? You get the same effect with the S, and with the arguable benefit of leaving some of the earnings at the corporate level to pass through without FICA tax. Also, be sure there is no appreciable property that you will be moving into a C corporation. That would include intangibles. It's very difficult to get appreciated property out of a C corporation without paying tax twice on the gain, which is not a good thing. | |
| 25 June 2008 | |
| I am not sure about basis... S corp basis to C corp?
Also what about the asset value? New based upon book value at time of conversion? New basis based upon FMV... Thank you for any help | |
| 25 June 2008 | |
| Tony, please fill out your profile if you would like a correct answer. | |
| June 25, 2008 | |
| We don't wait for incorrect answers. So basis is basis. It's in the hands of the shareholders, not the corp. It's just that their basis will get pretty locked in when it's a C corp. Nothing changes on company books. | |
| 25 June 2008 | |
| I would be happy to list my profile, however I cannot seem to find the right direction as to how to do it...
So I transfer the assets to the C corp at their balance sheet value and just continue the depreciation as if nothing changed? The S shareholders have negative basis in the S corp, so they are no longer able to use the losses generated by the S corp on their personal returns. Any effect of this negative basis on the conversation to C status? | |
| 25 June 2008 | |
| click on the profile link and then hit the 'edit this page' tab, then save | |
| 25 June 2008 | |
| One other question...
I know a S corporation can own a C corp. I also know an C cannot own an S. If a S corp owns a C corp, can the S corporation take advantage of losses generated by that C corp it owns? How is that reported on the tax return? | |
| 25 June 2008 | |
| Kevin, What do I do. Just change the wording on the page the Almanac created for me? | |
| 25 June 2008 | |
| Kevin, I changed it.. I really don't know why that makes a difference in the answer. Wouldn't the question dictate the answer? | |
| June 25, 2008 | |
| I think that with negative basis, which there really is no such thing...you've got a problem. Since as a C there can't be any earnings undistributed which can cover the negative, your only choice is to tax them on that, which creates basis back to zero again.
Why are you switching to C anyway? | |
| 25 June 2008 | |
| It's a long story.. The S shareholders are also owners of other S's as well. In order to take advantage of the losses, it is necessary to move money, supplement with loans and basically enhance basis. Too much manipulating, and too much work tracking same. Not sure as to why the client incorporated as an S in the first place as basis was always going to be a problem. It was the advice of the tax attorney. I guess we feel as a C we can at least take advantage or the losses or at least carry them forward and not have to worry about basis.. | |
| 25 June 2008 | |
| the reason the profile dictates the answer is because with a profile you know (or assume) what level to address the question. A first year preparer is not going to understand the same as a 20 year experienced credentialed professional, therefore you use differnet words and direct them to different things for the basics first. | |
| June 25, 2008 | |
| Well, I don't see how having a C solves the problems. It merely creates more problems and losses that still can't be used until there's income anyway, same as you'd have in the S basis issues at this point. I can think of about 900 reasons to never have a C corp, and only about 3 to have one. This ain't one of the three. | |
| June 25, 2008 | |
| 4
And they are: You're required by IRS reg. You have NOL's to carryover. You have huge medical reimbursement opportunity. You have a foreign investor. | |
| 25 June 2008 | |
| "If a S corp owns a C corp, can the S corporation take advantage of losses generated by that C corp it owns? How is that reported on the tax return?"
No, of course not, unless you make a Qsub election for the C corp (which then becomes a disregarded entity, a "branch" of the S corp). C corp losses carry back or forward only to offset C corp income. They never flow through to a stockholder. | |
| 25 June 2008 | |
| Katie, Thank you for your response.
I am still confused as to how to handle the income or loses generated by the C as a Qsub or non entity?? How do you report a loss generated by the disregarded entity or branch and avoid having them flow through to the S stockholders? Now I know why people don't do this. It was not my idea... Than the attorney's for this one. | |
| 25 June 2008 | |
| Oh yeah, in this case the sole stockholder of the C corp is the S corp... | |
| 25 June 2008 | |
| Since the C corp is now a branch and a disregarded entity, does it still have to file a return?
Also, is the corporate status altered with the State of CA? | |
| 25 June 2008 | |
| You can't avoid having a Qsub's income or loss flow through to the stockholders of the S corp parent; in fact, that's the whole point of the exercise. If you elect Qsub status for the subsidiary, its income, deductions, credits, etc. will be included in the income, deductions, credits, etc. of the S corp parent. It does not file a separate tax return; however, for California purposes, if the Qsub is organized or qualified or doing business in California, it is subject to the $800 minimum tax (in addition to the parent S corporation's $800 minimum tax).
A valid federal Qsub election is effective for California purposes. It does not change the legal nature of the entity, which is still a corporation. You might want to read through the FTB's S corporation audit manual, especially the section on Qsubs: http://www.ftb.ca.gov/aboutFTB/manuals/audit/scorp/Ch14.pdf | |
| 27 June 2008 | |
| Another reason for a C Corp is the situation in which the client is newly incorporated and is going to have losses in the early years with little or no income from other sources. Losses from an S Corp would be of no benefit. | |
| 27 June 2008 | |
| Also, my new C Corps all have 6/30 FYE, so I'm able to do proper tax planning and preparation during a time in which I have temporarily regained my sanity. | |
DeacDiggler (talk|edits) said: | 27 June 2008 |
| how do losses from a C corp provide any benefit?
If you ever want to have disqualified shareholders, it's easy enough to accomplish it while still allowing your client to keep flowthrough status. Contribute your S corp to a new S corp and make a Qsub election for the operating subsidiary. Convert sub to an LLC under state law. Sell LLC interests to outside investors. Getting out of S corp is one of the worst ideas a client can have unless it is absolutely necessary, and based on the basic questions being asked here, it's pretty clear that you're not quite ready to advise them on this. I'd get the attorney involved again if you're not sure. | |
| 27 June 2008 | |
| Marcilio, I can understand the year end point, but I'm with Deac in wondering what the benefit of losses building up in a C corp might be. They are no use to anybody unless the corporation is profitable in future years. On the other hand, deductible losses (i.e., not passive and not limited by basis) flowing through from an S corporation may either offset the stockholder's other income, or create an NOL at the individual level that can be carried forward to offset income flowing from the S corp in the future. Seems to me you get at least as much, if not more benefit from the S corp losses as from losses locked up in a C corp.
Also, you want to be very careful about putting anything in a C corporation that may increase in value. That includes intangibles. It's very hard to get appreciated assets out of a C corporation without paying tax on the gain twice -- once at the corporate level and again on the dividend distribution to the stockholders. | |
Corptaxhelp (talk|edits) said: | June 27, 2008 |
| Katie: Even if the company is never profitable, being able to collect the losses might not be a bad idea... What if you're a C Corp with a lot of losses and you want to buy a highly profitable C Corp with huge (taxable) gains later down the line? The IRS says you can't buy losses but if you have losses, you can buy gains and then shelter them. So, there is certainly more than one way to turn lemons into lemonade. | |
| 27 June 2008 | |
| True, Corptax -- but it seems to me that's a pretty long shot. | |
| 27 June 2008 | |
| I find that C Corps can be fairly flexible with the use of accrual basis tax reporting and proper tax planning with bonuses, retirement plans, etc. I would never set up an entity as a C Corp if I anticipate appreciating assets. Each year I look at my corporations to determine the best way to go. Usually, when the corporation starts to be hugely profitable, I will switch to an S. | |
| 27 June 2008 | |
| After the corporation has absorbed all those carryforward losses, I presume! <G> | |
| June 27, 2008 | |
| And how many times does someone come on here with the idea that that C corp with those early losses, ooops, isn't making a profit, and now what to do. I stand my ground. There are four reasons for a C, noted above. And no more. | |
DeacDiggler (talk|edits) said: | 2 July 2008 |
| corptax - don't forget that Section 384 lurks out there to keep you from doing what you proposed. As do the SRLY rules if you're not careful.
Plus, suppose you do what you said - if the acquired company is as successful as you say, then you have successfully penned up a lot of intangible value in a C corp. BAD result. I still don't know why you wouldn't set up the entity as an S corp in the first place if you can. Or an LLC. C corp would be my last choice. | |
