C-Corpp to S-Corp > 1120S Balance sheet

[cientax]

Have a new client that was C-Corp and changed to S-Corp last year. Question, do the balances from the 1120 balance sheet at end of 2006 carry to the begining balance on 1120S for 2007?

[BulldogTom]

Have a new client that was C-Corp and changed to S-Corp last year. Question, do the balances from the 1120 balance sheet at end of 2006 carry to the begining balance on 1120S for 2007?

Don't you have a short year when you make the election? They should transfer over at that point.

Tom

Lodi, CA

[Maribeth]

Have a new client that was C-Corp and changed to S-Corp last year. Question, do the balances from the 1120 balance sheet at end of 2006 carry to the begining balance on 1120S for 2007?

The balances carryover from the C to the S. Remember that the balance sheet is based on accounting principles, not on tax principles. The only thing you have changed is the method of taxation for the corporation.

Maribeth

[cientax]

The balances carryover from the C to the S. Remember that the balance sheet is based on accounting principles, not on tax principles. The only thing you have changed is the method of taxation for the corporation.

Maribeth

Actually I just found out a minute ago that the previous preparer did not file an 1120 for 2006 ant that they were told to continue to operate as sole prop during the entire year of 2006 even though they incorporated in march of 2006 and also found out they didn't keep any books. So does that mean I just start with zero begining balances on the balance sheet on the return? Their gross receipts were less than $10M so no M-3 is required. Please advise.

[BulldogTom]

OH boy. I think when they incorporated they told the IRS they would be filing a 1120. The service should be looking for it.

Are you saying that the taxpayer reported all the corporation's transactions on his own schedule C? There were no transactions at all recorded on the Corp's books? How about now? Is it still not being recorded on the corp's books?

Since there probably is a tax difference between corp and sch c reporting, you have a mess to clean up. I think the IRS is going to be looking for that tax return. Depending on how much business they did, you may get away with all zeros and assert that the corporation never really began (a valid argument if they never treated it like a corporation in the first place). Then make the S election and start business and start acting like a corporation should.

I smell a hefty retainer on this one.

Tom

Lodi, CA

[Maribeth]

Actually I just found out a minute ago that the previous preparer did not file an 1120 for 2006 ant that they were told to continue to operate as sole prop during the entire year of 2006 even though they incorporated in march of 2006 and also found out they didn't keep any books. So does that mean I just start with zero begining balances on the balance sheet on the return? Their gross receipts were less than $10M so no M-3 is required. Please advise.

Okay . . . . if they were advised to continue on as a sole prorietorship for 2006 and they reported any income/expenses for 2006 on their Schedule C, then I would probably file an 1120 now for 2006, showing NO ACTIVITY on the face of page 1. Then start your books for 2007, showing the assets that are transferred in from the incorporators and recording your common stock. Your beginning balance sheet would be blank; your ending balance sheet would have your end of the year numbers.

Now, if they did issue stock for some consideration in 2006, then you would have those numbers on your beginning balance sheet.

Maribeth

[cientax]

Okay . . . . if they were advised to continue on as a sole prorietorship for 2006 and they reported any income/expenses for 2006 on their Schedule C, then I would probably file an 1120 now for 2006, showing NO ACTIVITY on the face of page 1. Then start your books for 2007, showing the assets that are transferred in from the incorporators and recording your common stock. Your beginning balance sheet would be blank; your ending balance sheet would have your end of the year numbers.

Now, if they did issue stock for some consideration in 2006, then you would have those numbers on your beginning balance sheet.

Maribeth

I was actually going to assert that they were operating as sole prop for 2006 since they were told to report on sch-C for 2006 but, they filed the state franchise report in 2007 which is supposed to be based on the figures for 2006. The report was due May 30 2007 but wasn't filed until Sept 3 2007 but they could have had an extension for the report. Any suggestions as to how to proceed. Thanks.

[Maribeth]

I was actually going to assert that they were operating as sole prop for 2006 since they were told to report on sch-C for 2006 but, they filed the state franchise report in 2007 which is supposed to be based on the figures for 2006. The report was due May 30 2007 but wasn't filed until Sept 3 2007 but they could have had an extension for the report. Any suggestions as to how to proceed. Thanks.

It appears to me that any tax that should have been paid for 2006 has now been paid. The shareholder paid income tax and SE tax on his 2006 return. The State of Texas received a franchise tax for 2006 for the non-active corporation.

If it were my client, I would document all of this information and make sure that the memo went into the permanent file. I would document how the client received bad advice from their prior professionals, that all the tax has been paid, and all income/expense has been reported, albeit on an incorrect form. I would review this information with the client, discuss with the client what could happen in the future regarding the mis-filings, and then I would put it all to bed.

I would then get my client into compliance for 2007, file the correct returns and move on.

This is what I would do.

Maribeth

[cientax]

It appears to me that any tax that should have been paid for 2006 has now been paid. The shareholder paid income tax and SE tax on his 2006 return. The State of Texas received a franchise tax for 2006 for the non-active corporation.

If it were my client, I would document all of this information and make sure that the memo went into the permanent file. I would document how the client received bad advice from their prior professionals, that all the tax has been paid, and all income/expense has been reported, albeit on an incorrect form. I would review this information with the client, discuss with the client what could happen in the future regarding the mis-filings, and then I would put it all to bed.

I would then get my client into compliance for 2007, file the correct returns and move on.

This is what I would do.

Maribeth

Maribeth,

You made it sound so simple and logical and why I never looked at it the way you did I don't know, but it sounds good to me. Thanks.

[Maribeth]

Maribeth,

You made it sound so simple and logical and why I never looked at it the way you did I don't know, but it sounds good to me. Thanks.

You're very welcome,

Maribeth