ERO Changing from Sole Prop to S-Corp

[cientax]

Wanting to change from sole prop to S-Corp, what is the process that has to be done with e-file center? I already have EIN for S-corp. I am ERO and have been for eleven years, if that makes any difference. I called the help desk and talked to a lady, but she confused me more than she helped me. Thanks.

[Gail in Virginia]

When we changed from sole-prop to S Corp, we had to get a new EFIN. We actually talked with someone at one of the IRS forums that summer, and they got us all squared away while we were there.

[cientax]

Do I have to file a new application and go through all the motions of background check, fingerprinting, etc...?

[Gail in Virginia]

According to Publication 3112, you must submit a new application if the "structure of the business has changed, requiring use of a new or different Taxpayer Identification Number (TIN),"

[Jack from Ohio]

Wanting to change from sole prop to S-Corp, what is the process that has to be done with e-file center? I already have EIN for S-corp. I am ERO and have been for eleven years, if that makes any difference. I called the help desk and talked to a lady, but she confused me more than she helped me. Thanks.

Edited due to incorrect information.

[barosser]

I changed last year and did not have to do everything again, just reapplied and it went thru pretty quick.

[OldJack]

Probably not a smart move. You will become a Personal Service Corporation. Tax BAD!! Corporate tax of 35% PERIOD. The taxed on the flow thru amount on your personal return as well.

Not recommended for tax professionals.

Personal services. Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts.

An S-corp is exempt from the classification of a Personal Service Corporation.

[HV Ken]

Probably not a smart move. You will become a Personal Service Corporation. Tax BAD!! Corporate tax of 35% PERIOD. The taxed on the flow thru amount on your personal return as well.

Not recommended for tax professionals.

Personal services. Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts.

Pub 542. http://www.irs.gov/publications/p542/ar02.html

Qualified personal service corporation. A qualified personal service corporation is taxed at a flat rate of 35% on taxable income. A corporation is a qualified personal service corporation if it meets both of the following tests.

1. Substantially all the corporation's activities involve the performance of personal services (as defined earlier under Personal services).

2. At least 95% of the corporation's stock, by value, is owned, directly or indirectly, by any of the following.

   1. Employees performing the personal services.

   2. Retired employees who had performed the personal services.

   3. An estate of the employee or retiree described above.

   4. Any person who acquired the stock of the corporation as a result of the death of an employee or retiree (but only for the 2-year period beginning on the date of the employee's or retiree's death).

S-Corp's are pass-thru entities via a K-1 to the personal return. I have not seen an S-Corp where there is a 35% corporate tax imposed. I have not seen a place on an S-Corp return where that tax you cite could even be calculated! What you posted sounds more like a C-Corp to me.

[cientax]

So Mr. Barosser, can you give more details please. Thank you

[JohnH]

As already stated, S-corps are not affected by the PSC rules.

But even the PSC rules for a C-corp can be side-stepped by having a spouse as a shareholder (provided the spouse isn't working in the business).

[michaelmars]

As already stated, S-corps are not affected by the PSC rules.

But even the PSC rules for a C-corp can be side-stepped by having a spouse as a shareholder (provided the spouse isn't working in the business).

CAN'T BE A spouse in a psc unless you too hold a professional license. we got nailed on this for a couple of clients on S corps we inherited where the doctors put their spouses as shareholders

[Lion EA]

I think that's the point. Have whatever the percentage of NONprofessionals in the C-corp that's needed to avoid the PSC designation and, therefore, the 35% tax rate.

[JohnH]

I think Michael is referring to the state Professional Corporation (PC) rules, rather than the IRS Personal Service Corporation (PSC) rules. In most states, all shareholders of a PC must be licensed in that profession. I think that would automatically cause it to be a PSC subject to the 35% rate. The only way for a PC to bypass the PSC would be to make the S-corp election.

But if a non-professional can be a minority shareholder of a PC under the rules of the state, or if the corp is a regular C-corp rather than a PC, then having the requisite amount of stock owned by the non-professional would avoid the PSC rules.

I've also read that only a CPA comes under the PSC rules and an EA doesn't, but I don't remember what the reasoning behind that was. Perhaps it had something to do with the fact that the EA designation applies to tax preparation, not accounting, and tax preparation is not one of the professions listed under the PSC rules.

[cientax]

Do I have to file a new application and go through all the motions of background check, fingerprinting, etc...?

Going back to my original question above, since neither me nor my wife have a professional license and all of what "I" do is mostly income tax preparation. My wife only does secretarial work and we have enough clients to stay open year round. We don't even have notary services. How would this affect my election for S-corp status with both of us as shareholders (50% each)?

Thank for all your comments.