Posted January 3, 2017
S Corp status back to January 2016. No problem! The late S corp election can easily be done well into 2017 for 2016. The Watson CPA Group does about 80-90 of these per year with 100% success. Zero calories. No trans fats.
Do you remember the old Van Halen song, Hot for Teacher? “I don’t feel tardy.” We don’t want you to feel tardy about your election to be taxed as an S corporation.
So if you are past the 75 days, no worries- in true IRS fashion there is one rule (don’t be tardy), and fifty exceptions (my dog ate it). Form 2553 is no different, but it has to be done correctly and we can help!
S Corp Election Checklist
Before we get into the fees and how it works, and all that jazz, let’s go through a quick checklist to ensure that we are not going down the wrong road. As Doc Brown in Back to the Future says, “Roads? Where we’re going, we don’t need roads.” Well, in S Corp land we do-
- Does your business earn over $30,000 net income after expenses? Say Yes.
- Are you located in New York City or Tennessee where S corporation tax rates are egregious and suck up all the federal tax savings? Say No.
- Do you have other W-2 income that exceeds or comes close to exceeding the Social Security limits of $118,500 (2016) or $126,200 (2017)? Say No. If you say Yes, we need business income to exceed $80,000 in #1 above.
- Is this a going concern? In other words, is the business going to continue to earn the same income or more each year? Say Yes.
- Do you have an LLC or some other entity in place that can be elected to taxed as an S Corp? Say Yes. If you say No, we have options just not elegant ones.
Are you still here? Excellent news… read on!
Late S Corp Election
As you know, being taxed as an S Corp has huge tax savings because you avoid self-employment taxes. Through an S Corp election you are limiting the amount of income subject to Social Security and Medicare taxes which are bundled to be called self-employment taxes. The savings is easily 8-9% of your net business income after taxes, and if you need more information on how this works and other S corporation advantages click on the button below-
Form 2553 (the S Corp election form) must be filed with the IRS which tells the IRS that your entity (LLC, partnership or C corporation) wants to be taxed as an S corporation. It is typically due within 75 days of forming your business entity or the start of your fiscal year, however, there is relief for the late filing of Form 2553 and the Watson CPA Group can guide you through that. IRS Revenue Procedures 2003-43 and 2004-48 used to be the governing rules but the IRS has simplified the procedure (imagine that!).
IRS Revenue Procedure 2013-30, effective September 3 2013, allows an entity to get relief and file a late S corp election within 3 years and 75 days from the date the election was originally intended to be effective. Holy cow. Three years! The IRS is basically saying that if you walk and smell like an S-Corp, then you are an S corporation.
So, if it is November 2016, and you want to go back to January 1 2016 for setting up s corp status, no problem. We prepare and file Form 2553 under IRS RevProc 2013-30, open payroll accounts in your home state, process a payroll event that encompasses the entire year and you get a nice W-2. Done! All that is left is preparing your S corporation tax return on Form 1120S and your individual tax return. Fees-
- Late S Corp Election, $375 ($300 for timely elections)
- Payroll Setup, $300
- Q4 Payroll Event, $300
Five states require a separate S corporation election form to be filed- Arkansas (really?!), New York, New Jersey, Ohio and sometimes Wisconsin
If you live in a community property state such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin your spouse might need to sign the Form 2553 even if he or she is not a shareholder. As a side bar, community property laws originate from Spanish property laws which is why most of our bordering states are community property states. Wisconsin has no excuse, and Idaho was just caught in some peer pressure from Washington and Nevada.
2016 Late S Corp Election
Let’s say it is March 2017 (tax season) and you are freakin’ out because you forgot to make the S corp election earlier, you can still file an S corp election Form 2553 back to January 1 2016 but there are hiccups. Isn’t hiccups such a friendly word? Sort of like bumps in the road. No one says pitfalls or disasters anymore, just hiccups. Bottom line is we can engage in some revisionist history on March 1 2017 and create a payroll event for December 31 2016. No worries. Fees-
- Prior Year Late S Corp Election, $375
- Payroll Setup, $300
- Prior Year 12/31/16 Manual Payroll Event, $350 + $150 manual processing (this has to be done manually since deadlines were missed, and it includes writing penalty abatement letters)
- 2016 Corporate and Personal tax returns, typically about $1,200 for both
Total out the door for 2016 is $2,375. Some of these fees are sunk like the late S election and payroll setup- having said that, if your net business income is over $30,000 after expenses, your benefits exceed your costs including tax preparation. Boom! Economists love cost-benefit stuff.
If your current CPA or tax professional says No, we suggest you find a new accountant (or at least educate him or her). The Watson CPA Group has been doing this for over a decade (there was relief provisions prior to the 2013 IRS Rev Proc as well) without major problems. You will incur late payroll filing penalties which usually can be abated under the First Time Abatement statutory relief program; some states are sticklers and don’t offer relief. Then again, if your savings is $8,000 and your penalty is $800, we’d say you are in good shape to do a late S corporation election, but we’re no mathematicians.
Three things happen simultaneously with a the prior year late S Corp election-
- Filing of Form 2553,
- Processing payroll for shareholders, and
- Preparing the S corporation’s tax returns (Form 1120S)
Since the IRS is a huge organization, the right hand doesn’t always talk to the left hand. And it is common for the corporate tax returns to be rejected since the late S Corp election is not processed. Not to worry, we simply re-submit and we are batting 100% over the past decade in getting the late S corp election pushed through. Of course, your mileage might vary and you could be the one like Maverick in Top Gun, but we seriously doubt it.
S Corp Package
The Watson CPA Group specializes in S corporations which have a small number of shareholders, and often just a one-person show. Because it is a core competency for us, we have created an S corp package that includes the following (No, the S doesn’t stand for stormtrooper)-
- S Corporation Tax Prep (Form 1120S)
- Individual Tax Prep (Form 1040)
- S Corp Payroll Events (required by IRS), Filings and Deposits
- Estimated Tax Payments (done thru payroll)
- Q3 Tax Modeling and Projection (Questionnaire)
- Unlimited Consultation and Periodic Business Reviews (PBR)
- Small Business Tax Deductions Optimization
- Annual Processing (W2s and other filings)
- IRS Audit Defense
Our annual fee for the S Corp package is $2,640 (or about $220 per month). Do you want to parse it out? Sure. If you did your own payroll processing, our fee reduces to $2,160. Perhaps saving $480 to add chores to your Sunday is a consideration (yup, that’s a bit sarcastic). If you do your own individual tax return, our fee reduces to $2,240. However, the benefit of the Watson CPA Group preparing both tax returns is that we slide things around depending on income limitations, phaseouts, alternative minimum tax (AMT), etc.
The button below links to our Periodic Business Review (PBR) Agenda. We use this throughout the year as a checklist for our business clients. We can also use it for any type of business consultation.
How does all this work? Let’s chat! Your unique situation will probably fit the S corporation world, but a dialogue is much better to determine the viability. Contact us to schedule a complimentary consultation. If all goes well, we will prepare a proposal which outlines the scope of services. View a sample proposal here.
Late LLC Formation with S Corp Election
One of the situations we face often is when taxpayers are operating as a sole proprietor without an LLC or other entity structure. This doesn’t allow for an S Corp election and subsequent tax savings. So, what can be done? We create an LLC immediately and elect it to be taxed as an S corporation. Next, we allocate income and expenses between the sole proprietorship and the S Corp using the date of inception. Finally, we shift the remaining income by issuing a 1099-MISC from the sole proprietorship using your SSN to the S corporation’s EIN.
Self Employed 401k Plan
Now that you can save thousands of dollars in self employment taxes with an S Corp election, you should invest that wisely. The Watson CPA Group is a small business too, and we understand that any extra dollars usually get invested back into the growing company. Having said that, there are several small business retirement plans which include solo 401k plans, profit sharing plans, cash balance and defined benefits pensions.
For example, with a solo 401k plan piggybacked with a defined benefits pension, you could sock away over $192,000 at age 50. All tax deferred if you like, which could yield a savings of over $86,000 (assuming a 45% marginal tax rate with federal and state). Wow!
Note how we purposely did not mention SEP IRAs. These are old school and are usually designed to be crisis management tools (after the fact) rather than good planning tools. Read more about the various self employed retirement options, including retirement tax bombs and the difference between tax deferral and tax savings below-
Please contact us today to get started on the late S corp election. All the cool kids are doing it- well, most, and we’ll have to ask several questions to make sure the fit is right.
The Watson CPA Group (team profile)