Late 1120s Election - 3 years late.

[SunTaxMan]

New client.

HISTORY.

TP (Pennsylvania resident) filed Articles of Incorporation (in Delaware) in October 2006. No Corp returns have been filed to date. CPA (PA resident) who set up Corp in DE, also did 2006 personal returns (Federal, two states and local)) and did not advise or inquire about Corp returns for 2006. TP has been taking a reasonable wage from Corp since inception. He is not the only employee. 941s, SUTA, FUTA all filed and up to date. To date, NO inquiry has arrived from DE or IRS about the absent Corp returns.

HRB prepared personal returns for 2007. No discussion about who owns the Corp that generated the W-2. Apparently no questioning about whether taxpayer was even "involved" in any business enterprise. HRB (apparently) simply accepted TP info, as presented (W-2s, 1098), without asking any further questions, prepared the returns (Fed, two states and local). Apparenty no questioning about whether TP might be involved in any business. (He is sole shareholder in Corp.)

TP came to me with 2008 W-2, 1098. I know the TP and have been aware of business activity. I asked for prior years returns. He gave me personal returns only. I asked, "Where are (1) prior years' corp returns and, (2) corp info to 2008 file corp returns?" He said "What Corp returns? I never thought I had to do anything with Corp - just file on my W-2."

QUESTION.

This scenario would seem to be adequate explanation to accompany late-filed 2553. My thought is to file 2553 ASAP with effective date of October 2006 - inception date of Corp.

Reasonable approach?

I am also thinking that it might be wise to file all prior year 1120s returns with 2553. Wise or 'premature' conclusion? Would it be better to file prior returns after 2553 accepted?

Suggestions and/or comments appreciated.

As to profit or loss from Corp activity, TP says, "I don't know. There is barely enough money to cover wages and expenses. I don't think I am making any money. I don't have anything extra." My observation - lifestle is not lavish or extravagant, but....... He apparently has not been keeping track. Gross Revenue for 2007 about $350,000. For 2008, about $650,000 - but those are "estimates!" Judging from (1) my observation and (2) wife's comments, I suspect there may be an NOL worth investigating.

[JohnH]

Why complicate things? The client might be better off if you just file the corp as a regular C corp and forget the S corp option altogether. At the very least you will find it necessary to amend the personal returns for 2006 & 2007 if you should get the S corp election approved retroactively. Wouldn't it be simpler to just file the election for the 2009 year and leave 2007 & 2008 as theya re?

Even if you find that the C corp had profits and if you find there were non-salary distributions or constructive dividends, the tax on the dividends would be less than the tax on the additional s-corp income on the personal returns.

[kcjenkins]

First problem I see with filing late election is that to do that you have to show that they 'thought' they were a sub S, and they reported on their personal returns as such. You do not have that here. So I believe you are going to be stuck with the corp being a C for the first years. That of course means that any NOL is stuck in the corp. But, if he has been taking out salary in proportion to what he thought the corp could 'afford', then perhaps there is not much NOL, or profit, and you can get the C corp books up to date and filed, then determine what to do for 09.

[michaelmars]

don't rush to file S election. if the corp does have losses you can lower w-2 income for 2009 and the profit will not be taxed until the NOL is used up... the very first step is to get the prior years up to date.

[OldJack]

Before deciding what to do I would prepare the financial information to do a corporate tax return for those years because regardless of what form, the returns have to be prepared. At the same time find out if the corporation had filed to be a S-corp when it was first established.