Q:

Subject: Tax information

I read your article S vs C corporations and want to thank you for clearing up some of the myths between these two type of corporations.

All my recommendations have been to setup as an S corporation without much clarification.  This information is very clear and to the

point for us new to starting up a business and I’d like to thank you for that.

 I was wondering if you would be willing to clarify a few points with me.

I started a side company up in 2005 and filed for an S corporation status.

From what I understand reading this article, since I have not filed my 2005 taxes I still have the option to convert back to a C corporation.

Am I understanding this correctly?  If so what is required to change this back?

Also on my net profits, which were $21K, under a C corporation are you saying I would pay only 15% taxes on this income?

Where as I would pay a higher tax rate with an S corporation by adding this $21K to my normal income from my job.

 I know this is a busy time of year and I appreciate any feedback you would have for me.

 Thank you

A:

You are a classic case of someone who is headed for tax disaster unless you start working with a professional tax advisor immediately.   This is not something that you can do on your own, regardless of what information you read on the internet, including anything I have written or posted.  

If IRS has approved your S election, they will be expecting an S Corporation income tax return (1120S) for the calendar year in which the S election was granted.  You cannot just change your mind and file a C corporation return (1120) instead.  When you submitted the 2553, you obligated yourself to include the corp's net income on your 1040.  You must honor that obligation, even though you obviously made it without understanding what it entailed.  That was your fault for not working with a tax pro before deciding to file for the S election.

There are procedures for revoking the S election, but that will not entitle you to change the fiscal year from 12/31.  You will need to set up a brand new C corp in order to do that.

Get with a tax pro ASAP to see what can be salvaged of your do-it-yourself mess.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/23/2006 11:29:00 AM Send this post: