Form 1120-S CPA discusses S Corporation issues for 2012 | Form 2553, Form 8832 and Form 7004

Form 1120-S CPAs use a variety of sources to stay current on emerging S Corporation trends. The inspiration for this post came from the October 2012 issue of the American Institute of Certified Public Accountant’s Tax Advisor journal.

Startup Jitters for S Corporations: Form 8832 and Form 2553

I think most Form 1120-S CPAs agree the IRS is pretty good about allowing S Corporations to stay as S Corporation if there’s some problem with inadvertent disqualification during setup. In my experience most inadvertent terminations stem from Form 8832 (where a LLC elects to become a Corporation) issues and Form 2553 issues where the Corporation elects to become an S Corporation. Annoying but no real problem.But other topics include clarification of eligible shareholders, types of stock allow etc.

The Tax Advisor states the IRS is getting tougher on startup jitters by looking at the overall picture of the S Corporation candidate instead of just the bureaucratic process. What are they looking for? Cases involving income shifting and tax avoidance. I’ve looked at a few of the cases and it seems to me the IRS draws a gray line here. So, talk to your Form 1120-S CPA, especially during the startup period.

“Moral of the story? For S Corporation setup give the IRS what it wants; in the format they want it in, and on time.”
- Gary Bode, S Corporation CPA

Form 1120-S Late Penalties

The IRS late penalty of $195 per shareholder is now enforced. So be sure to file a timely extension (Form 7004) and submit Form 1120-S on time.

Various Form 1120-S Issues

• Keep close track of Shareholder loans. Have a formal debt instrument in place if the total amount of loans exceed $25,000.
• Keep corporate Minutes. Even if the meeting is with yourself.
• Use Corporate minutes to document major S Corporation decisions.

Employees vs. Subcontractors

Form 1120S CPAs try to keep their S Corporation clients clear on this matter. But IRS regulations are soft. Each case is different. Have your CPA or attorney help develop corporate guidelines on worker classification and document them in the Minutes. Last year a new check box appeared on Form 1120-S asking if the Corporation had subcontractors, and if so, were Form 1099-MISC submitted.

Can the IRS tell if you’re paying employees as subcontractors or paying subcontractors under the table? I’d say yes in about 95% of the time. But in the past they haven’t done much about it. Are they serious about collecting payroll taxes on employees paid as subcontractors now? Yes. The Voluntary Classification Settlement Program (VCSP) allows past transgressors to come clean for a small penalty if they promise to be compliant in the future. So contrary to their street rep, the IRS isn’t about punishment on this issue.

Changing from a C Corporation to an S Corporation

Discuss the ramifications of such a change carefully with your CPA. Weigh advantages to potential tax issues.

S Corporation Shareholder Payroll/Distribution Ratio

The IRS expects S Corporation shareholders to draw an appropriate salary. There’s a separate line on Form 1120-S to report this. But guidelines are soft. An advantage of an S Corporation is that distributions escape self-employment tax. These taxes are probably back to 15.3% in 2013. This is a big deal to many S Corporation shareholders. Have your Form 1120-S CPA help you craft Corporate Minutes that delineate your salary as appropriate.

I’m an S Corporation CPA that operates as an S Corporation, so you know I stay current on emerging Form 1120-S issues. My virtual office allows us to serve your S Corporation wherever it’s located. For a free phone consult call (910) 399-2705.