Discussion:S corp salary on SCH SE
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Discussion Forum Index --> Tax Questions --> S corp salary on SCH SE
| 16 February 2008 | |
| I know, I know. I've read every thread out there.
Situation: new s corp client. previous cpa included reasonable salary, but no w2, no 1099, no sch c. however, he passed comp onto SCH SE to "keep them legal". client does not keep separate business bank account. Question: before I advise them on either starting payroll or terminating s corp election and maintaining business as llc sch c (small profit/low liability risk anyway), is the prior cpa's way a valid way to keep them paying se tax when they elect not to do payroll correctly OR was this his way of doing less work? they say he did not advise them to start payroll or keep business $ separate. thanks for all your insight. fuzzy from long research hours... | |
Bottom Line (talk|edits) said: | 16 February 2008 |
| Since he didn't advise them to keep money separate OR to start payroll, I'd say he was missing some things. Whether he was trying to do less work or was not properly advising them, I couldn't make a guess. | |
| 16 February 2008 | |
| Whatever the prior accountant's motive, he was wrong. Put the client on the right path. | |
| 16 February 2008 | |
| What % of profit B4 salary deduction was put on Sch C? From the facts re commingling, IRS can argue that 100% of profit was distributed, and tack FICA on the distribution, less what was reported via Sch SE. | |
| 16 February 2008 | |
| no sch c done! salary deduction on 1120s was 94% of profits b4 salary ded, so they wouldn't owe much on fica but how about unemployment taxes not paid by s corp? even before salary, profits less than $25K and probably he's hit the ceiling on revenue. | |
| 16 February 2008 | |
| At least SE was done and paid, right? And I assume the 1040 didn't bounce re the odd SE. IRS in an audit would have no net deficiency on the FICA issue (beyond the remaining 6% of "sort-of" distribution). FUTA is small and not our doing either. Fix for future, I would agree also. | |
| 29 February 2008 | |
| So the client has decided to revoke s-corp status. I understand how to file the election under 1362(a). However, I am confused on the tax effect of this election. And it's probably a very simple theory glitch in my brain... but any help is appreciated.
After filing revocation and 1120s as final return for 2007, the LLC remains. For 2008, LLC/Sch C will be filed. S-Corp must liqudate (as though it were purchased) to Sch C, correct? Very small business, only one asset and negative basis (APIC plus basis is about $5K). OR is there a reorganization clause I am missing for flow-thru-corporation to flow-thru-corporation?? | |
| 29 February 2008 | |
| Rwine, you are aware of the 5 year waiting period for people checking the "stupid box"? | |
| 29 February 2008 | |
| as I read it, that's 5 years to wait to elect to be s corp again, correct?
and-they did file correct paperwork with state/fed to be incorp'ed as llc then elected on proper form for s-election tax status. so I'm not sure they fall into the people-checking-box category? | |
| 29 February 2008 | |
| "An eligible entity that makes an election to change its classifcation cannot change its classification by election again during the 60-month period following the effective date of the election." In other words, they're stuck with S corp tax status for 60 months, they can't just revert back to disregarded (without treating it as a corp dissolution, which, now that I'm writing this, is what they'd have to do anyways, so NEVERMIND.) It just won't be the same LLC, they'll have to start another. | |
| 29 February 2008 | |
| okay so their options are
1. keep s corp until 60 months is up and then do the revocation and then the corp would be dissolved or would it be transferred tax-free to sch c/llc? 2. revoke s corp status now and dissolve corp completely and start new llc? | |
| 1 March 2008 | |
| thank you for your help! I normally stick with ind. returns and this is my first s corp return and of course the situation was a nightmare! cpa started them as s corp back in 2005, then had to run from IRS b/c she sets up s corps as tax shelters-no wages/salaries, etc. the cpa who took over her clients has done a pretty good job of keeping them legal, but never really explained to them the way to correct the mess. | |
| 1 March 2008 | |
| I think I'm confused (again!) regarding the 'revocation'. If you do as Kevin suggests, and I agree, and just dissolve the corporation and the LLC and start from scratch, wouldn't this be the easiest, cleanest way? If you had lots of assets, capital issues, etc., this would take a whole lot more than this simple solution. I never thought I'd get to the point of telling clients to just dissolved their corporations, but too, too, too often these 'corporations' are not. Even when they have a separate checking account, they run personal stuff through it, they don't even think about doing payroll and simply treat it as a SP. Too many potential problems and too much work on both sides for whatever little tax savings there might be and the liability issue may be moot as well. Keep this simple! | |
| 1 March 2008 | |
| yes, this client is definetely not a corporation technically and not a good candidate for corp status.
question: why dissolve the llc? I thought llc (incorporation articles) were the "legal" part and the s election was the "tax" part. obviously I'm missing something simple. I've been through sec. 1362 but maybe you all can point me to the subsection discussing this. thanks for your time! | |
| 1 March 2008 | |
| you are missing the Form 8832 election which is bypassed (but assumed, therefore you're stuck with it) by filing the 2553
JR calls this 'check the box' form the 'stupid box' in case you wanted to search therefore this LLC cannot revert back to 'default classification' for 5 years from S election it can only do a taxable liquidation | |
| 1 March 2008 | |
| if the client wants the LLC shell, then the client will have to contribute the assets to a new LLC
| |
| 1 March 2008 | |
| (I think JR and I should go out and teach classes on this stuff. Between his fanaticism and my fantacism, we could do the world a bit of good) | |
| 2 March 2008 | |
| thank you so much! that's exactly what I was looking for. I don't know how you all have time to prepare returns with answering all these basic questions from part-timers like me. but, however done, it is all much appreciated! | |
| 2 March 2008 | |
| I solicit donations of Girl Scout cookies. : ) they keep me going. | |
| 2 March 2008 | |
| and don't downplay your questions - they certainly were not basic questions | |
| 2 March 2008 | |
| one correction above: after 60 months as an S, it still isn't tax free to revert to sch C LLC. | |
RoyDaleOne (talk|edits) said: | 2 March 2008 |
| There is case to be made that the S Corp does not have any business activity.
How does the S Corp bill it customers(IE under what name)? If all the cash receipts and cash disbursements are going through the shareholders' personal account(I guess don't know for sure) how does anyone know that it should belong to the S Corp? | |
