Posted December 19, 2017
S Corp status back to January 2017. No problem! The late S corp election can easily be done well into 2018 for 2017. 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 $127,200 (2017)? Say No. If you say Yes, we need net business income to exceed $200,000 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 8-10% of your net business income after expenses, and if you need more information on how this works and other S corporation advantages click on the button below-
Still not sure or not convinced? No problem… please check out Line 57 on your Form 1040 tax return. This number reflects the self-employment taxes paid on your business income. We want to reduce this by 60 to 65%.
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 2017, and you want to go back to January 1 2017 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-$450 (like NY and PA, rough!)
- Q4 Payroll Event and Tax Planning, $350
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 (red does not mean Republican). Wisconsin has no excuse, and Idaho was just caught in some peer pressure from Washington and Nevada.
While most of our clients are primarily in California, Nevada, Colorado, Texas, the Midwest, Florida and New England, we serve business owners in all 50 states plus Washington D.C.
Section 199A Pass Thru Tax Reform
Section 199A deduction also known as the Qualified Business Income deduction arises from the Tax Cuts & Jobs Act of 2017. This is a significant tax break for small business owners but there are rules and limits of course. We have written a short article which outlines what is considered a qualified business for the qualified business income deduction including the dreaded specified service trade definitions (which is easily summed up as “any trade or business where the principal asset is the reputation or skill” of the owner). Click on the button below for our article-
S corporations remain a critical tax saving tool for two reasons. First, the usual self-employment tax savings remains intact for all business owners including specified service trades or businesses. Second, a business owner might need to pay W-2 wages to himself or herself to not be limited by income, and only corporations can pay W-2 wages to owners (in other words, an LLC cannot without an S Corp election). Read the article above for riveting information!
2017 Late S Corp Election
Let’s say it is March 2018 (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 2017 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 2018 and back date Shareholder Wages / Officer Compensation for December 31 2017. No worries. Fees-
- Prior Year Late S Corp Election, $375
- Payroll Setup, $300-$450
- Officer Compensation via 1099 and Tax Planning, $350
- 2017 Corporate and Personal tax returns, typically about $1,300 for both
Total out the door for 2017 is $2,225. 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.
So, if you have $100,000 in net business income after expenses, you’ll still pocket about $5,800 after our fee and your S corporation will be set up and ready to go for 2017 and 2018.
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.
Three things happen simultaneously with a the prior year late S Corp election-
- Filing of Form 2553,
- Determining reasonable Shareholder Wage / Officer Compensation, 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. Therefore 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. Did you know that 95% of all S Corps have only one shareholder, and 99% of all S Corps have three or fewer shareholders? Small business owners is all we do!
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 Corp Reasonable Salary Calculation (sample RCReports)||Yes||Yes||Yes||Yes|
|Section 199A QBI Tax Optimization (more info)||Yes||Yes||Yes||Yes|
|S Corp Payroll Filings and Deposits||Yes||Yes|
|Annual Processing (W2s and other filings)||Yes||Yes|
|S Corporation Tax Prep (Form 1120S)||Yes||Yes||Yes||Yes|
|Individual Tax Prep (Form 1040), One Owner||Yes||Yes|
|Estimated Tax Payments (done thru payroll or directly by us)||Yes||Yes||Yes||Yes|
|2018 Tax Planning, Mock Tax Returns (Questionnaire)||Yes||Yes||Yes||Yes|
|Unlimited Consultation and Periodic Business Reviews (PBR)||Yes||Yes||Yes||Yes|
|First Research Industry Reports (sample report)||Yes||Yes||Yes||Yes|
|Small Business Tax Deductions Optimization||Yes||Yes||Yes||Yes|
|Solo 401k Plan (more info)||Yes||Yes||Yes||Yes|
|IRS Audit Defense||Yes||Yes|
Couple of things to keep in mind- we make very little profits on payroll processing… we offer it as a convenience to our clients. One throat to choke with a single call can be reassuring but if you want to run your payroll, go for it!. And… 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. Having our arms around both can yield some good tax savings!
Some more things to consider- Since only a partial year remains, our usual annual fee is pro-rated to not charge you for services you didn’t use (like payroll and consultation). However, a large chunk of our annual fee is tax preparation which is typically a fixed amount of $1,300 (both corporate and personal). Whether we onboard you in January, July or December, we have to prepare a full year tax return. This increases the monthly fee for the remaining months of 2018 but the monthly fee will later decrease in January of 2019 to reflect the amounts above. Yeah, we make it sound like 2019 is just around the corner.
Section 199A Deduction Optimization
Section 199A is a derivative of the recent Tax Cuts & Jobs Act of 2017. In a nutshell, business owners including rental property owners will enjoy a 20% deduction based on the qualified business income. There are limitations based on income, W-2 wages and depreciation. As a result, there is some optimization that is necessary for a small business owner to get the most from the Section 199A deduction. On one hand we want to reduce W-2 salaries to shareholders to minimize self-employment taxes. On the other hand, we want to increase W-2 salaries so they do not limit the amount of Section 199A that is deducted.
This seems straightforward since payroll taxes are 15.3% plus some unemployment and other insidious stuff and the Section 199A Qualified Business Income deduction is 20%. However, the 20% Section 199A deduction must be multiplied by the marginal tax rate to obtain the true tax benefit. Even at a 37% marginal tax rate, the additional payroll taxes might exceed the Section 199A deduction tax benefit. Again, optimization is important. We will have to model this out once the dust settles, but be aware of this consideration. Read our full Section 199A Qualified Business Income article by clicking on the button below-
Our Business Expertise
As mentioned elsewhere we primarily focus on small business owners and their unique consultation and tax preparation needs. With 9 full-time consultation professionals including Certified Public Accountants and Certified Financial Planners on our team, the Watson CPA Group consults on corporate structures, S corp elections (even late S corp elections back to January), tax strategies, business coaching, industry analysis, executive benefits, retirement planning including individual 401k plans, exit strategies, business valuations, income tax modeling and tax representation.
We also work with business law attorneys in California, Texas and Colorado for business owners who have additional needs such as buying or selling a business including employee stock ownership plans and partner buy-ins. We also coordinate with Polycomp and RPS to create age-based profit sharing plans and cash balance (defined benefit) plans. We can run point on whatever your business needs so the communication is effective and efficient.
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 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)