Partnership Filing Question

[Crank]

Client formed a two member LLC on 1/15/20, has no revenue and about $3k in expenses for 2020 and wants to be taxed as an S corp.   

EIN doc says to file 1065. I assumed I would file an 1120S along with a 2553 to make the S corp election.

First time doing this and any help is appreciated.  Thanks

[Lee B]

  Just because they have expenses doesn't mean they open for business ?

I believe the path your propose must be done by March 15th.

[Crank]

Not sure what you mean about open for business.  Cant we claim the losses without revenue?  They have a website up and running just no sales have happened yet.

I read that the S corp election must be done no later than 2.5 months after the beginning of the tax year.  I interpreted this to be 3/15/20 for TY2020.  However I believe you can "late elect" and have it applicable to TY2020 under certain circumstances.

[jklcpa]

1 hour ago, Crank said:

Not sure what you mean about open for business.  Cant we claim the losses without revenue?  They have a website up and running just no sales have happened yet.

Good article from The Tax Advisor specifically about when the S corp comes into existence. 
"An S corporation's initial tax year does not begin until the earliest to occur of the following three events: the corporation has shareholders, acquires assets, or begins doing business. The term "month" is defined as the period starting on the day within the calendar month that is numerically equal to the first day of the tax year and ending on the day before the same numerical day in the next calendar month (Regs. Sec. 1.1362-6(a)(2)(ii)(C)). Since most newly formed corporations do not begin their first tax year on the first day of a calendar month, the election deadline may not fall on the 15th of a given month."    "

"Practitioners will generally find that the earliest of these three dates is triggered by the legal incorporation process (the filing or registration date of the articles of incorporation with the secretary of state). At this point, even though the shares of stock may not actually have been issued, the corporation may be deemed to have shareholders and, therefore, be considered to have satisfied one of the three tests."

There's much more in the article and worth reading.

1 hour ago, Crank said:

I read that the S corp election must be done no later than 2.5 months after the beginning of the tax year.  I interpreted this to be 3/15/20 for TY2020.  However I believe you can "late elect" and have it applicable to TY2020 under certain circumstances.

The 3/15/20 deadline assumes that the business was for a full year, so obviously a short year return will have had a different deadline.  I am not entirely sure this business would qualify for the late election.  Was there reasonable cause for missing the date to elect?  Worth a try?  Why do the owners want to be an S corp instead of a partnership?

[Abby Normal]

You can either late elect S status, or file a 1065 for 2020 and elect S for 2021.

The question of 'open for business' is a facts and circumstances test. You can be open with no sales and it sounds like they were open.

[Crank]

36 minutes ago, jklcpa said:

Good article from The Tax Advisor specifically about when the S corp comes into existence. 
"An S corporation's initial tax year does not begin until the earliest to occur of the following three events: the corporation has shareholders, acquires assets, or begins doing business. The term "month" is defined as the period starting on the day within the calendar month that is numerically equal to the first day of the tax year and ending on the day before the same numerical day in the next calendar month (Regs. Sec. 1.1362-6(a)(2)(ii)(C)). Since most newly formed corporations do not begin their first tax year on the first day of a calendar month, the election deadline may not fall on the 15th of a given month."    "

"Practitioners will generally find that the earliest of these three dates is triggered by the legal incorporation process (the filing or registration date of the articles of incorporation with the secretary of state). At this point, even though the shares of stock may not actually have been issued, the corporation may be deemed to have shareholders and, therefore, be considered to have satisfied one of the three tests."

There's much more in the article and worth reading.

The 3/15/20 deadline assumes that the business was for a full year, so obviously a short year return will have had a different deadline.  I am not entirely sure this business would qualify for the late election.  Was there reasonable cause for missing the date to elect?  Worth a try?  Why do the owners want to be an S corp instead of a partnership?

Thanks for the reply.

I don't do many business returns outside of sole proprietorships so my knowledge is limited but I believe the reason for the S corp is the single passthrough taxation vs the possible double taxation of the partnership.  

Id love clarification on this issue.

 

 

[Lee B]

46 minutes ago, Crank said:

 

I don't do many business returns outside of sole proprietorships so my knowledge is limited but I believe the reason for the S corp is the single passthrough taxation vs the possible double taxation of the partnership.  

Id love clarification on this issue.

 

 

According to the IRS, there has to be a business reason for electing S status, above and beyond the avoidance of payroll taxes.