Valid Reason (S-Corp Election)

[ILLMAS]

Hello to all, I have a client that formed a corporation in 2008 and the corporation didn't go as planned (No employees, very little income, and a loss at the end of 2008). Now he wants to change to a S-Corp., I know the IRS might a accept a late election, but what would be a valid reason? It's not like amending a tax return, I am having trouble coming up with a reason, even though the reason is to reduce his taxable income (1040) and avoid double taxation. Any suggestions?

[jainen]

>>I am having trouble coming up with a reason<<

The reason your client is requesting approval of a late election is that his bookkeeper was killed in a car wreck on the way to the post office to mail the original election. Between the cops impounding the car as evidence and the estate refusing to cooperate in any investigation, your client has only just now discovered that the election was never submitted. Even though the key death and other factors caused business results to fall short of plans, your client feels obligated to file according to the decision that was approved by the corporate board of directors before these other things became known.

[Bart]

Hello to all, I have a client that formed a corporation in 2008 and the corporation didn't go as planned (No employees, very little income, and a loss at the end of 2008). Now he wants to change to a S-Corp., I know the IRS might a accept a late election, but what would be a valid reason? It's not like amending a tax return, I am having trouble coming up with a reason, even though the reason is to reduce his taxable income (1040) and avoid double taxation. Any suggestions?

He relied on advice from a professional.

[OldJack]

>>He relied on advice from a professional.<<

He relied on statements from jainen.

[ILLMAS]

Thanks, but a lot clients say one thing and do another thing.

[TAXBILLY]

Did he incorporate the business himself or did he rely on a professional? If he did it himself he was ignorant of the advantages of S-Corp election. If he relied on a professional, did that person explain to him the advantages? These could be possible reasons for a late election, I would think.

taxbilly

[jainen]

>>If he did it himself he was ignorant of the advantages of S-Corp election. If he relied on a professional, did that person explain to him the advantages? These could be possible reasons for a late election<<

Well, I take my lesson from a certain political leader. If you are going to tell a lie, make it a big one! And we know that every single suggestion in this thread (including any that will be posted later) would in fact be no less a lie than the one I told. The original post was perfectly clear about the real reason: "Now he wants to change to a S-Corp."

Sorry folks, he can't use any kind of hindsight to justify a late S-corp election. He'll have to lie.

[ed_accountant]

Bad planning is not one of the exceptions.

I would suggest that you tell your client that if they make the election now it would be timely filed and effective for year 2009.

Good luck

[OldJack]

>>and a loss at the end of 2008<<

>>and avoid double taxation<<

If he has a loss in the first year 2008, he would not have a problem with double taxation as the loss is carried forward to reduce 2009 C-corp income. He should not elect S-corp for 2009 unless he does not want to deduct the 2008 loss until the corporation is liquidated. He needs to control 2009 income to match the 2008 loss and then elect S-corp if he wants. However, when you elect S-corp after C-corp earnings you have the old built-in-gains and related tax on any assets to deal with for the next 10 years. If there is no future profits expected he should just liquidate the C-corp and go home.

[taxxcpa]

Once I had a client who was losing money on a C Corp. He would have been better off switching to an S Corp after the first year or two of losses. The business continued losing until he finally sold it.

[OldJack]

The business continued losing until he finally sold it.

When he sold it the sale price was probably lower than his basis so he finally got his deduction for the losses by way of the sale price. Unfortunately that would be a capital loss whereas the losses could have been ordinary each year as a S-corp.

[Margaret CPA in OH]

Well, the losses as an S-corp would have been deductible only to extent of basis. With ongoing losses, he might not have had sufficient basis to take them. I have a client now who has significant losses that cannot be taken because of no basis. He exists yet because of credit card debt and equipment. He is not happy!