S-Corp to PSC

[TaxmannEA]

I just need confirmation here. If the stock in an S-Corp that engages in personal services but is owned by a non-participating shareholder is bought by an active member of the business, then the Corp changes from an S-Corp to a PSC. Am I correct? 

[rfassett]

I do not believe that is correct for Federal purposes.  Your State law may dictate otherwise.

[OldJack]

An S-Corp is never a PSC.

[rfassett]

IRC 269A clearly states that a personal service corporations (PSC) formed or availed of to avoid or evade income tax by reducing the income of, or securing the benefit of any expense, deduction, credit, exclusion, or other allowance for, any employee-owner which would not otherwise be available, then the Secretary may allocate all income, deductions, credits, exclusions, and other allowances between such personal service corporation and its employee-owners, if such allocation is necessary to prevent avoidance or evasion of Federal income tax or clearly to reflect the income of the personal service corporation or any of its employee-owners. So yes it is a violation of the tax code as I understand it to elect to be an S-Corp simply in an effort to recognize losses on a PSC that is no longer operational. You either loose those losses or you figure out a way for the PSC to make $$ to offset losses. However there is no language in IRC 1362 prohibiting a viable ongoing PSC from filing IRS Form 2553 Election by a Small Business Corporation .

IRC 1362 address the election; revocation and; termination of Sub-chapter S status. In general a small business corporation may elect, in accordance with the provisions of this section, to be an S corporation if all shareholders consent to the election and the election is timely made and the entity is not listed as an ineligible corporation (bank, insurance company, 'possession corporation', or a domestic international sales corporation).

[OldJack]

20 hours ago, rfassett said:

So yes it is a violation of the tax code as I understand it to elect to be an S-Corp simply in an effort to recognize losses on a PSC that is no longer operational. You either loose those losses or you figure out a way for the PSC to make $$ to offset losses. However there is no language in IRC 1362 prohibiting a viable ongoing PSC from filing IRS Form 2553 Election by a Small Business Corporation .

 

This is IF the business is already a C-Corp PSC and electing to be an S-corp.  I don't think the original post was talking about a C-Corp already existing, rather a new business (non corporate) electing to be an S-Corp or a S-Corp continuing as an S-Corp.  Only a C-Corp can be a PSC.

[michaelmars]

I am an S corp for the past 27 years

 

[TaxmannEA]

This is an accounting firm that is owned by a person who is not an accountant and does no work directly related to the accounting and tax prep performed. The firm may be sold to an accountant who currently works for this business. At the current time, the corp is an S-corp as the lack of performance by the sole shareholder does not trigger PSC status, My question is if the acquisition of the stock by a staff member will trigger a termination of S-corp status to a PSC or whether S-corp status may be continued. This is not a CPA firm but a accounting, bookkeeping, and tax prep office.

[jklcpa]

14 minutes ago, TaxmannEA said:

This is an accounting firm that is owned by a person who is not an accountant and does no work directly related to the accounting and tax prep performed. The firm may be sold to an accountant who currently works for this business. At the current time, the corp is an S-corp as the lack of performance by the sole shareholder does not trigger PSC status, My question is if the acquisition of the stock by a staff member will trigger a termination of S-corp status to a PSC or whether S-corp status may be continued. This is not a CPA firm but a accounting, bookkeeping, and tax prep office.

The fact that the new owner will be actively working in this business is irrelevant to the S corp status.  My own practice was an S corp for many years.

As long as this new owner is an individual that will not cause an inadvertent termination of the S election (eg- being a non-resident alien, corp, partnership), adding that individual as a stockholder would not exceed the 100 shareholder limit, and the S corp's gross income from passive activities doesn't exceed 25% of the gross income, then the corporation will remain an S corp.  S corps aren't PSCs.

[TaxmannEA]

Thanks. I always get turned around when I look at this issue.  

[michaelmars]

why would he buy the corp and then assume liablility for prior work?  he should buy the client list, assets and name.  The standing S corp, changes its name and registers the old name as a dba that he sells to the new guy.  Or old and new form a partnership with both names. Once the seller is paid off then the buyer changes name dropping sellers [or keeps it if he wants]  We have bought many practices but would never buy a corp and have the preparer penalties hang over our head.