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Suggestions for "reasonable cause" for late 1120S election.


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#1 Jack from Ohio

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Posted 27 March 2012 - 11:02 AM

Client had C-Corp for 10 years and was barely able to make even a small profit. 2010 his business finally got it's feet and started making decent profits. All officers have had reasonable salaries paid for all year.

Decided to make the S election November 2011.

What would be some acceptable wording for "reasonable cause" for filing the election late?

1120S was e-filed and accepted 2-28-12 with 2553 attached as a .pdf. IRS sent it back, due to some missing signatures and the explanation.

Any ideas? We have till April 25 to reply.

#2 michaelmars

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Posted 27 March 2012 - 11:50 AM

i usually say that there was confussion between the attorney and the cpa as to whom was going to prepare the election....never had one come back rejected.

#3 jainen

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Posted 27 March 2012 - 12:15 PM

>>What would be some acceptable wording for "reasonable cause" for filing the election late?<<

I hate this question. You aren't supposed to just make up something that sounds good. What in fact was the real reason?

I'll tell you one thing. Don't bother saying stuff like "his business finally got it's feet and started making decent profits.... Decided to make the S election November 2011." That's the WORST reason, where they want a retroactive election after seeing how the business did.

The best reasons (only if true) involve some outside event the company could not control, like death of a key officer, destruction of records, or a court order. I don't consider michaelmars suggestion in that category, but might allow it if corporate minutes or other records show a timely decision was ACTUALLY made.

#4 Jack from Ohio

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Posted 27 March 2012 - 12:35 PM

How about the real true reason that the stockholders made the decision to become an S in fall of 2011. September exactly. Will that be "reasonable cause?" I hate the term "reasonable" anything!! One man's reasonable is another man's unreasonable.

#5 jainen

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Posted 27 March 2012 - 01:13 PM

>>Will that be "reasonable cause?"<<

No. It may have been reasonable, but it wasn't the cause. I mean, you can't just say they filed late because they decided late.

Why didn't they decide when they were supposed to a year earlier, with the business already looking so good? Or, having decided in September 2011, why didn't they file the election for 2012 in the ordinary time line?

#6 michaelmars

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Posted 27 March 2012 - 02:40 PM

of course literally Jainen is right but the irs has been very liberal in allowing late elections. you do have to watch out though for state ramifications. Client probably didn't decide late, but you did after he brought you his information. All you can do is try, let the client know the choices and if the S gets rejected then he will have to file new returns and pay the piper, including you for a new return. You can elect with the return but since the election was already filed the chances of acceptance just went way down. Your arguement might be that if you waited to elect until you filed the return it would have been accepted, the client shouldn't be penalized for filing the election sooner....good luck

#7 OldJack

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Posted 27 March 2012 - 06:32 PM

Well... is it a good idea to elect S-corp status?

If the C-corp has not been profitable what about any NOL loss carryovers that would be suspended with the S-election?
What about the fact that you have to deal with an asset FMV appraisal and Built-In-Gains (Big Tax every time an asset is sold) ?
What tax effect is there on all shareholders? Officer Salary is not required for a C-corp.
Did the shareholders take into consideration the current max tax on dividends verses ordinary income and what future tax rates may be?
Sure there may be double tax if profit is not controlled. And there are many other factors to consider.

Maybe you are lucky the IRS rejected the 1120S and 2553?

#8 jainen

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Posted 28 March 2012 - 03:35 PM

>>if you waited to elect until you filed the return it would have been accepted<<

The election for 2011 was due before March 15th of LAST year. Since they didn't decide until September 2011, they should be electing to be an S-corp starting in 2012.

#9 michaelmars

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Posted 29 March 2012 - 10:04 AM

the 1120s has a box now to check if you are electing with the return and you simple include a 2553.

#10 Jack from Ohio

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Posted 29 March 2012 - 10:19 AM

the 1120s has a box now to check if you are electing with the return and you simple include a 2553.

This was the process. 1120S was e-filed in Feb. The IRS sent the 2553 back for missing information. One of the pieces was the part to explain the reasons. Hence my questions about what constitutes "reasonable cause." The IRS did NOT reject the 2553, just needed missing information.

All your input(s) have been enlightening, informative and a bit amusing....




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