LLC Taxation

[Diane]

I have a client with a newly formed 2 person LLC. They have a small loss for 2009. Has not filed anything yet. Wants to file as an S Corp if possible. So, from what I've read, can I file the 1120S by the due date with the Form 2553 attached requesting S Corp status for 2009? If not, what do I do?

Diane

[TAXBILLY]

The procedure for late elections is here:

http://www.irs.gov/pub/irs-pdf/i2553.pdf

taxbilly

[jainen]

>>can I file the 1120S by the due date with the Form 2553 attached requesting S Corp status for 2009?<<

In my opinion, the IRS is tolerant of late S elections. But you still must have reasonable cause, and in my opinion that is strongest if you can identify a specific outside event that prevented timely filing, rather than business operations you normally should have been able to control. In my opinion, the very worst reason is anything suggesting the decision was made later after the loss began to develop. In fact, in my opinion you should address that directly, documenting (that is, with documents) that your intention from the very beginning had always been S-corp.

[Diane]

Can the explanation be that it was newly formed in 2009, with the intent to be an S Corp since it has 2 members, and intended to file election with the tax return.

Diane

[jainen]

>>Can the explanation be that it was newly formed in 2009, with the intent to be an S Corp since it has 2 members, and intended to file election with the tax return.<<

In my opinion, that is the best example of the worst reason. It suggests that their intention right from the start had always been to wait until they could see how things went before making the S-election. It also points out that the whole thing was easily controlled by a very small number of insiders actively engaged in making those very decisions about how to set it up. But that's just my opinion.

[Diane]

How would you word the explanation? Basically, these 2 guys just set up the LLC (didn't tell me) and started doing business. Not much for 2009. I don't think they even thought about how they would file the tax return. The only other alternative would be to file them as a Partnership, then file the Form 2553; but, I really don't want to do that.

Diane

[kcjenkins]

So the reason you give is that they did not realize that they had to file the 2553, or they thought that the attorney did it, or that it was automatic, etc, but always intended to be an S corp and operated as if they were an S corp, etc.

How did they form the business? Did they consult an attorney or did they buy the idea that LegalZoom or such would do all that was needed? [she says sarcastically.]

[jainen]

>>So the reason you give is that they did not realize that they had to file the 2553, or they thought that the attorney did it, or that it was automatic, etc<<

In my opinion, you would of course only use one of those reasons if it were true. They haven't mentioned any of them to you yet, in fact they told you they were going to make the election with the tax return, i.e., at the end of the year. So in my opinion none of those are good reasons because none of them are true. At least (in my opinion) none of them sound like they are true.

>>always intended to be an S corp and operated as if they were an S corp<<

Now, THIS is one of my favorite reasons (if true), and in my opinion the IRS likes it very much too! Why, one of their procedures for late election is based entirely on this reason. In my opinion it's very easy to document too, which is probably why it's so successful. Did they pay reasonable wages? Do their corporate governance papers and board of directors minutes rave about how important S status is for the health of the company? Does their written business plan anticipate early losses that are typically more valuable as a pass-through than a carryover? Did they pay reasonable wages? Did they apply for credit with personal guarantees reflecting the S-status? Were they scrupulous about documenting shareholder eligibility and proactively avoiding anything that might look like a second class of stock? Did they specifically track basis adjustments in an ongoing manner? Did they utilize and calculate Section 179 and other separately stated items in the optimal way for the shareholders? Did they pay reasonable wages?

[Diane]

They paid no wages because they have no money. They provide umpires and referees for sports events in our County. They have no assets and the only debts (so far) are the money they had to put in to pay umpires/referees, etc. They will eventually be reimbursed by the different clubs/teams, etc. I'm sure they hope to make a profit this year, but the start up year was a loss. Right now I'm not sure the process they went through to set up the LLC. I'm assuming they set it up according to the State requirements, etc., to get it going. They have their Federal ID and all State ID's.

Diane

[jainen]

>>They will eventually be reimbursed by the different clubs/teams, etc<<

In my opinion, they can't claim a loss based on expenses they expect to be reimbursed anyway. If they want pass-through, in my opinion they can file as a partnership which is the default entity for the disregarded LLC. Perhaps they could consider a timely election to file as a corporation for this year.

[Diane]

I'm thinking that's probably the best way to go (Partnership) with the least amount of problems. And file the 2553 now for Year 2010.

Thanks for all the discussion. It sure helps to have someone to bounce this stuff off of.

Diane