Moving from sole proprietorship to S Corp Mid-Year

[gmc2287]

Hello,

I started a business this past year, and I originally filed with my state as a sole proprietor. I want to transfer over to an S Corp because I would like to have my business taxes and personal tax separate from one another.

I haven't made any money yet in my business, but I will have a small income once I transfer over to the S Corp (launching membership features).

That being said, when I file my taxes at the end of the year, would I include my business deductions (Jan-Oct) from when I was a sole proprietor on my personal taxes, and then income/expenses from my business (Nov-Dec) separately? Or could I put all of the years expenses onto the S-corp taxes?

Thanks for your help! 

[Critter-3]

First an S-Corp is a pass thru entity and you must pay yourself wages and file payroll tax returns timely before you can take draws.  It is a pass thru entity so the federal taxes are still paid on the not the corp return.  

Next, have you incorporated yet ?   When you got the EIN when did you indicate the corp would start ?  When did the IRS confirmation notice indicate the corp would officially start ? 

[gmc2287]

I haven't incorporated yet, the EIN attached to my business is attached to the sole proprietorship.

[Critter-3 · Accepted solution]

Good ... I highly suggest you wait and complete the 2020 tax year as a sole prop  and start  the corp on 1/1/2021  ... make a clean break and start the payroll tax reports in the new tax year.  You will need to get a new EIN which you can do first thing in Jan and ask for a start date of 1/1/21.  And make the S-Corp election to start with on the SS-4. 

https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-a-new-ein

Generally, businesses need a new EIN when their ownership or structure has changed. Although changing the name of your business does not require you to obtain a new EIN, you may wish to visit the Business Name Change page to find out what actions are required if you change the name of your business. The information below provides answers to frequently asked questions about changing your EIN. If, after reading the information below, you find that you need an EIN, please see How to Apply for an EIN.

Sole Proprietors

You will be required to obtain a new EIN if any of the following statements are true.

• You are subject to a bankruptcy proceeding.
• You incorporate.
• You take in partners and operate as a partnership.
• You purchase or inherit an existing business that you operate as a sole proprietorship.

[Anonymous · Accepted solution]

I suggest you use a tax pro the first year to prepare the S-Corp return.  besides the need to take a  salary you would also have to file payroll tax returns and pay in payroll taxes.  There's the need to maintain adequate records, possibly have workmen's compensation insurance.  Also based on what your business is doing the pro can advise on using an S-Corp or LLC. each has its pros and cons. 

[Carl]

I would like to have my business taxes and personal tax separate from one another.

That's not a good reason to make the S-Corp election. I do wonder if you have any idea of the can of worms you may be opening up for yourself here.

In order for an LLC to be treated like an S-Corp, that business must "act" like an S-Corp. That means you are required to follow all the laws, rules and regulations at all levels of government that apply to an S-Corp.  For example, you are "REQUIRED" to take minimum draws every year. Most states also require quarterly filings of the BOD meeting minutes, among other things. Then there's quarterly tax payments and possibly monthly depending on the specifics (which could include more than just payroll taxes). Yearly tax returns are due March 15th, and not Apr 15th like for personal tax returns.

Fines and penalties are steep for a corporation too, when compared to a personal tax return. For example, the late filing penalty for a late tax return (filed March 16 or after) is $200 per month, per owner. So with a single-owner S-Corp filed on Apr 15th, the penalty is $200. File it the next day on Apr 16th, and the fine is $400.

Miss the deadline for a required state filing, and those fees are steep. Here in FL an "on time" yearly registration filing is $125. A late filing is $425. Not filed within 90 days past deadline? The status of the business registration is changed to "inactive" and it will cost you no less than $1000 to get it back to active status. Continue operating the business while it's status is inactive? $10,000 *PER* *DAY* fine for that.

NOw I've been operating a single member LLC for over 15 years now, and I have no problem keeping my personal finances separate from business.  I have a checking account that is for the business only and nothing else. No exceptions. Ever. All business transactions are run through that account with no exceptions. Once a month (usually on the first) I will take what is called an "owner's draw" out of that count and deposit it to the personal checking account.  I have a check/debit card that is for that account, and it's used for business only, with no exceptions.

I track my business money with Quickbooks, and my personal finances with Quicken. Separation of business and personal is not an issue and never has been.

[AmeliesUncle]

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@gmc2287 wrote:

I want to transfer over to an S Corp because I would like to have my business taxes and personal tax separate from one another.

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 The S-corporation income ends up on your personal tax return anyways, so that is not a reason to have a S-corporation.   

PLEASE sit down with a local tax professional that can analyze you ENTIRE situation to determine the best option for you.  In addition to the amount of taxes, be sure the tax professional tells you all of the additional work and expenses associated with a corporation.