Chronicles of Tax Advisors
The conversion from filing as a Sole Proprietor to filing as an S Corporation can sometimes be tricky. You must meet several requirements, some of the more common ones being: there mustn’t be more than 100 shareholders, no nonresident alien shareholders allowed, only one class of stock allowed, and the request must be timely filed. You must file an S Election request no later than two months and 15 days after the beginning of the tax year the S Election should take effect. However, there is relief for failure to meet this timely filing requirement.
We had a client whose income had increased substantially during the course of the current tax year. The client, who was a sole proprietor listed as an LLC, decide they wanted to convert to an S Corporation for the current tax year. As a sole proprietor, they would have paid self-employment taxes on over $500,000. That translates to $30,149 in self-employment taxes alone. Since S Corporation Income is not subject to self-employment taxes, the conversion would present itself as a great tax savings. The only problem was that the filing deadline had already passed ten months earlier. We requested relief for Late S Corporation conversion.
Election using IRS Revenue Procedure Election codes for the prior year was granted the conversion to an S Corporation. Next we had to report W2 income for the single shareholder since the IRS will not allow you to completely avoid Self Employment or Social Security Taxes. From the $500,000 net income we reported W2 wages paid to the shareholder of $100,000 on their personal return, the remaining $400,000 flowed through to the shareholder’s personal return as ordinary income subject to the taxpayer’s regular tax but not self-employment tax. The shareholder effectively paid $15,300 in social security taxes between their W2 and the S Corporation. In conclusion, the S corporation conversion saved the taxpayer $14,849 in taxes for that year, and we were also able to request waiver of late S-corporation election.
Todd Ancona, EA
Licensed to practice before the Internal Revenue Service
An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.