I started business on 01/01/2015 as a sole proprietor, change to LLC on 12/15/2015, elect S Corp on 01/15/2016. Can I file taxes as S Corp including all income from 2015?

[jdgieschen]

For example, if I made $50,000 net profit as a sole proprietor from 01/01/2015 to 12/14/2015, and I made $50,000 net profit as LLC from 12/15/2015 to the end of the year 2015, and file for S Corp status, can I include the $100,000 as net profit when filing taxes as S Corp?

[Critter1 · Accepted solution]

No, once you incorporated there are now 2 entities so you cannot just put it all on the Sch C or on the S-corp.  The IRS will expect a corporate return since you told them that the business started in 2015 thus  you have to file a 2015 return. If you choose a calendar tax year then you will file a "short" tax year for 2015. 

The S-Corp return  will require the Turbo Tax BUSINESS program (not to be confused with the Home & Business version). Since this is your first corporate return you may want to use a paid preparer so you can get educated on this different form and rules. 

Some information to start your education.....

An S-corp can make distributions, but the rules are complex.

This article has a reasonably clear discussion of what is required: 

http://www.aicpa.org/Publications/TaxAdviser/2014/January/Pages/Nitti_jan2014.aspx

Also see the following IRS discussion: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis

The IRS position is that an S-Corporation MUST pay a reasonable compensation to an officer before non-wage distributions may be made.  The reason is that they feel that non-wage distributions when no wages are paid is an avoidance of social security taxes.  From the IRS website at http://www.irs.gov/businesses/small/article/0,,id=203100,00.html :

"Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense and subject to employment taxes."

The page cites Joly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000) as one judicial finding on the IRS's authority to reclassify distributions to wages subject to employment taxes.  Factors to determine reasonable compensation are given in the ruling.

The AICPA has an interesting article on this topic here: http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

You also might want to read a lively discussion on the Tax Almanac website here: http://www.taxalmanac.org/index.php/Discussion_Forum_-_Tax_Questions .  The substance of the discussion seems to be that taking a reasonable salary is not optional and, if you took distributions with no salary, the distributions should be changed to salary with appropriate employment tax returns being filed (late, if necessary.) 

The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return.

[SweetieJean]

@Critter Since the S Corp election isn't being made until 1/15/2016, does the S Corp even exist for 2015?

[Critter1]

Yes it does since they incorporated in 2015 (C-corp) and they have until they file the first timely return to make the S-corp election (which can now be done when filing the first return ... it doesn't have to be done in advance anymore).

[Critter1]

Of course the dates are all funky since it is only 12/6/15 .... I assume the OP is thinking about doing this or they really meant 2014.  If you are going to change making the corp start date 1/1/16 would be a cleaner situation... no part year returns to deal with.

[SweetieJean]

This almost sounds like a homework question, since it's unlikely the LLC would make a $50,000 net profit during the last two weeks of the year.

[TaxGuyBill]

If you tax the business as a corporation, I REALLY, REALLY suggest going to a tax professional for at least the first year to get things set up correctly.

[jdgieschen]

Thanks, everyone. You answered my question well and right away -- Critter, especially. We talked to about 10 CPAs. I think about 7 of them said what you did, and 2 or 3 of them said that we could take our income from when we were a sole proprietor and file it under the S Corp tax return, which would save us a bunch on taxes. The profit figures that I gave were a bit random, yes, as real figures are a bit private. Anywho, I guess we just have to bite the bullet and give oodles of cash to Big Brother. Thanks a bunch 😉 You guys are awesome!