S-Corp Status for 2013?

[Jack from Ohio]

Client is one of those that does not follow directions. She has a profitable, approx. $75K in 2012, Sole Proprietorship. A year ago, her banker told her she should "become an S-Corp" to save taxes. (we all know bankers are the oracle of tax wisdom) She insisted that was what she wanted to do. She lives in Illinois. Filed her business name with State of IL and thought she was now incorporated.

This past July, we informed her of the steps necessary to become incorporated so we could file the S-Corp election. She did NOTHING.

Now she is adamant that we can still get her S-Corp status for 2013. I have told her that there is no way at this point. She did not establish an LLC, nor did she establish a corporation.

Is there something I don't know about, or do we need to give this client the heave-ho!!

Just looking for some reassurance that I have not lost it!! (sarcastic replies to this line are expected!!)

[michaelmars]

if the corp was formed you could elect S corp with the filing of 2013, I don't think you can retroactively form a corp. Were the deposits made out to a corporate name, the invoices, etc.

[Jack from Ohio]

if the corp was formed you could elect S corp with the filing of 2013, I don't think you can retroactively form a corp. Were the deposits made out to a corporate name, the invoices, etc.

941 payments were made to the EIN for her sole prop. I just had her tell me again... "...but my banker said..." It was very hard to be civil!!

[jklcpa]

If I gave the heave-ho to every client that didn't listen or follow through with my advice over the years, I wouldn't have too many clients left.

Did the sole prop have other employees or did she put herself on payroll?

Besides "the banker said...", are there any real benefits to her being an S corp?

[Jack from Ohio]

If I gave the heave-ho to every client that didn't listen or follow through with my advice over the years, I wouldn't have too many clients left.

Did the sole prop have other employees or did she put herself on payroll?

Besides "the banker said...", are there any real benefits to her being an S corp?

She did have 2 other employees and she did pay herself. She is doing all the payroll on her own to save money.

There is NO benefit for her to be an S-corp at her level of business profit. The business is her only source of income.

[Mr. Pencil]

She did not establish an LLC, nor did she establish a corporation.

Since you already forestalled my sarcasm, the best I can do is remind you to tell her that as a true professional you DO know a secret trick for the IRS, by which she can still file her taxes as a corporation even before the state approves the corporation. It's called check-the-box, and applies to any non-corporate entity including a sole proprietorship. Of course, for 2013 she would now have to qualify for late election relief (show her the Instructions for Form 8832). Which you can do easily enough--she just needs her other tax advisor to draft the statement of reasonable cause, because it was all HIS fault!

[michaelmars]

She did have 2 other employees and she did pay herself. She is doing all the payroll on her own to save money.

There is NO benefit for her to be an S-corp at her level of business profit. The business is her only source of income.

well the big benefit is corporate liability protection depending on her business, not every benefit has to do with saving $$. I am a corp, even though it doesn't shield me from professional liability, it does shield me if a client falls on my office property.

[Jack from Ohio]

well the big benefit is corporate liability protection depending on her business, not every benefit has to do with saving $$. I am a corp, even though it doesn't shield me from professional liability, it does shield me if a client falls on my office property.

She sells cosmetics.

[Lion EA]

Practical Tax Expert,§28,140.20,Request for Relief for Late Entity Classification and Late S Corporation Elections

A business entity with two or more owners that is not classified as a corporation underReg. §301.7701-2( (an eligible entity) may elect its classification for federal tax purposes. If it does not elect otherwise, it is treated as a partnership. If it elects to be classified as a corporation, it can also elect to be treated as an S corporation.

To be treated as an S corporation, the entity elects to be classified as a corporation by filing Form 8832, Entity Classification Election, and elects to be treated as an S corporation by filing Form 2553, Election by a Small Business Corporation. If an eligible entity timely files Form 2553 but fails to file the Form 8832, the entity is deemed to have timely filed a Form 8832 and is classified as a corporation as of the effective date of the S corporation election. Reg. §301.7701-3©(1)(v)©. However, if an eligible entity fails to timely file both Form 8832 and Form 2553, the entity is not classified as a corporation, and is also not treated as an S corporation.

Simplified methods of requesting relief for the late filing of a corporate classification election and the late filing of an S corporation election are available to an eligible entity that wishes to be treated as an S corporation. Rev. Proc. 2013-30, 2013-36 IRB 173. Under these procedures, an entity may request relief if:

(1)

the entity is an eligible entity, as defined in Reg. §301.7701-3(a);

(2)

the entity intended to be classified as a corporation as of the intended effective date of the S corporation status;

(3)

the entity fails to qualify as a corporation solely because Form 8832 was not timely filed, or Form 8832 was not deemed to have been filed;

(4)

the corporation intended to be classified as an S corporation as of the intended effective date of the election;

(5)

the entity fails to qualify as an S corporation on the intended effective date of the S corporation status solely because the S corporation election was not timely filed;

(6)

the entity has reasonable cause for its failure to file timely the S corporation election and the entity classification election and has acted diligently to correct the mistake upon its discovery;

(7)

either:

(i)

the entity timely filed all federal tax and information returns consistent with its requested S corporation status for all of the years the entity intended to be an S corporation; or

(ii)

the entity has not filed a federal tax or information return for the first year in which the election was intended to be effective because the due date has not passed for the year’s federal tax or information returns; and

(8)

the corporation requests relief within 3 years and 75 days after the intended effective date of the election (but see the exception to this requirement noted below).

An entity may request relief for late S corporation and entity classification elections under this procedure by filing with the applicable IRS Service Center (1) a properly completed Form 2553 with Form 1120S for the corporation’s current tax year, (2) properly completed Form 2553 with a Form 1120S for one of the corporation’s late-filed prior-year Forms 1120S, or (3) a properly completed Form 2553 submitted independently of Form 1120S. A properly completed Form 2553 includes a statement establishing reasonable cause for the failure to file the S corporation election timely. It must state at the top "FILED PURSUANT TO REV. PROC. 2013-30" and contain the declaration contained in Section 4.03(3) of Rev. Proc. 2013-30, 2013-36 IRB 173, signed under penalties of perjury and dated. If Form 2553 is filed with Form 1120S, the latter form must state at the top "INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30" or comply with instructions in the Instructions for Form 1120S.

A completed election must also include statements for all shareholders during the intended effective date and the date the election is filed that they have reported their income on all affected returns consistent with its sought S corporation status for the year the election should have been filed and for all subsequent years. These statements must contain the declaration contained in Section 4.03(3) of Rev. Proc. 2013-30, 2013-36 IRB 173, signed under penalties of perjury and dated. Upon receipt of a completed application requesting relief, the IRS will determine whether the requirements for granting relief for the late S corporation and entity classification elections have been satisfied. Rev. Proc. 2013-30, 2013-36 IRB 173.

An entity that does not meet the requirements to seek relief under the simplified procedure or is denied relief under the procedure may seek relief by requesting a letter ruling. Rev. Proc. 2013-30, 2013-36 IRB 173. See §28,140.15.

COMPLIANCE NOTE

No user fee applies when taking corrective action under this procedure.

COMMENT

Late-election relief for eligible entities that wished to be classified as S corporations was previously available under Rev. Proc. 2007-62, 2007-2 CB 786, and Rev. Proc. 2004-48, 2004-2 CB 172. However, these revenue procedures have been modified and superseded by Rev. Proc. 2013-30, 2013-36 IRB 173, effective September 3, 2013. Rev. Proc. 2013-30, 2013-36 IRB 173, applies to requests for late-election relief pending with the IRS on September 3, 2013, and to requests received thereafter.

[Jack from Ohio]

Practical Tax Expert,§28,140.20,Request for Relief for Late Entity Classification and Late S Corporation Elections

A business entity with two or more owners that is not classified as a corporation underReg. §301.7701-2( (an eligible entity) may elect its classification for federal tax

Problem here is, she is not an entity of any kind. All she has done was establish an EIN and secure her business name on the IL government site. Nothing more.

[Lion EA]

Did you show her the Reg? Or, show her banker the Reg?!

[Mr. Pencil]

Problem here is, she is not an entity of any kind. All she has done was establish an EIN and secure her business name on the IL government site. Nothing more.

You said she has a sole proprietorship. According to that reg Lion cited, 301.7701-2, "a business entity is any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under §301.7701-3)"

[Jack from Ohio]

You said she has a sole proprietorship. According to that reg Lion cited, 301.7701-2, "a business entity is any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under §301.7701-3)"

So all we have to do is file the 1120-S for 2013, include the 2553 and 8832 and "poof" she has S-Corp status for her Sole Proprietorship?

How did I miss this shortcut??

[Mr. Pencil]

So all we have to do is file the 1120-S for 2013, include the 2553 and 8832 and "poof" she has S-Corp status for her Sole Proprietorship?

How did I miss this shortcut??

I'm going to be sarcastic after all.

But first, item #6 in Lion's post above--if you and/or the banker can get through that one, you're home free!

Okay, now for the sarcasm. Since she sells cosmetics, she's probably fine with putting lipstick on a pig.

[Jack from Ohio]

Did you show her the Reg? Or, show her banker the Reg?!

I will NOT talk to the banker. I despise dealing with juvenile minds.

I'm going to get sarcastic after all. But first, check out item #6 in Lion's post above. If you and/or the banker can get through that one, you're home free!

Okay, now for the sarcasm. Since she sells cosmetics, she's probably fine with putting lipstick on a pig.

There is no "reasonable" explanation, and when we informed her in July, she has "acted diligently" to do NOTHING to correct the mistake.

All your responses are reinforcing my original thoughts.

[Mr. Pencil]

I despise dealing with juvenile minds.

And yet, you continue to respond to MY posts! Hey, if you're just going to give her the heave-ho anyway, then heave away. There's plenty more where she came from--there always are.

[Richcpaman]

Jack:

You know and I know, that she can't file as a S-Corp, because she never filed corporate documents with the IL State commission, so no corporation or proper entity exists.

You can suggest/and or prepare the required entity document to send to the IL filing commission and get the entity set up.

Whether you try to use the 2553/8832 dodge after that is up to you. It isn't right, and no way to make it so. *I* would not, just like you would not. It all "after the fact" stuff. But she can be good for 2014. And get her a new EIN.

You state that she made 75k in profit, was that including her W-2? Or after W-2? Or did the W-2 suck up all the profits?

Seems that if she took 75k in W2, I would prep the 1040 with a schedule C, put the W2 on page 1, complete the Sch C as needed, and only modify/adjust the SE tax accordingly.

Maybe she walks. Maybe her W2 is for 12k, and 63K is left over and she wants to avoid the FICA/MC on that....

Tough spot.

Rich

[Jack from Ohio]

And yet, you continue to respond to MY posts! Hey, if you're just going to give her the heave-ho anyway, then heave away. There's plenty more where she came from--there always are.

There is a difference between unable and intentional...

[Lion EA]

Yep, lipstick on a pig. Or, tell her to ask her banker to word the part about reasonable explanation. Or offer to help her set up by 15 March to become an S-corp for 2014, but charge her a bundle. And, don't do it unless/until she opens a corporate bank account and writes down her minutes/corporate resolutions. (How much product does she pull out of inventory for personal use?! It's all marketing when she wears the product, right?!)

[kcjenkins]

Talking to the banker would serve no purpose. Besides, from her behaviour, I rather doubt her version of what she was told. Sure, he might have mentioned that she might be able to save some taxes by forming an S-corp. Everybody who reads the papers knows that people like John Edwards and Newt Gingrich used that method to avoid lots of taxes. That hardly makes him responsible for the client's stupidity or irresponsible decision not to consult a professional about it.

[michaelmars]

the banker will just say "I was talking about going forward" sounds to me like she has a dba with an ein number.

[Lion EA]

Hey, we all know not to talk to bankers when they aren't our clients. We also know that the client probably misunderstood her banker, whether he was spot on or way off. Just tell her what can/can't be reported for 2013 and what can/can't be reported for 2014 -- and that it requires action on her part. Here's step one; call me when you're accomplished step one and I'll give you step two. (Step one might be the HRB phone number.) If she hasn't taken any steps in a year, then it's doubtful she'll keep up with record keeping, etc. Although, she's set up payroll...

[SFA]

Unless we are an attorney, we are not licensed to practice law, and shouldn't be held responsible for not preparing or filing legal documents for a client or providing legal advice. That's what attorneys are for or they can go to LegalZoom.com. Who hasn't heard of them?

If the client rammed ahead and put herself on payroll even though she is a sole proprietorship, too bad, how sad. Not your fault.

We do not write tax law, or change tax law for a client who has screwed up.

She should amend ALL of her payroll tax returns to remove herself as an employee of her sole proprietorship. Then file a Schedule C and follow the rules like everyone else.

So much for "saving money" and doing payroll herself.