1120S

[saucylouise]

Hi there, I have a complicated question. I formed an LLC and did a 1065 last year with k-1's to my partners. I elected to be an S corp, I don't know why and now I've complicated my life...lol. We do new builds and so I'm reporting the cost to build as expenses, and then proceeds on the other side as short term or long term cap gains using the cost of the land as a cost basis. Or is the property sold treated as inventory? And if so, how do I do that? I have 16 more lots that are also part of partnership and we are going to be continuing to build until we've sold all of them. 
Is that correct?

Also, another quick question that I think I might already know the answer, can I go ahead and file it as a 1065? Or do I now have to do it as a 1120S. Tks for your help. 

[Mike9241]

the 1065/1120S question indicates that you need professional help. if you filed an S-Corp election properly and timely then you have to file an 1120S and also a final 1065   also, doing new builds and selling may be a trade or business resulting in ordinary income, not capital gains. so last year that income could be self-employment income for each of the partners. SE tax is about 15% and not paying could result in substantial penalties for them.  there may be tax consequences to converting from a partnership to S-Corp.  if the shareholders (assuming you properly elected S-Corp) perform ed services for the Corp they should likely have been paid a salary. failure could result in significant penalties

if the $ value is high enough, you may be required to use the accrual method not the cash method of accounting.

better you have a pro look into this before you file than the iRS after you file. no one can be sure whether you need to file an 1120s./1065 or both.   the S-election could have been faulty.  the iRS will actually notify you but that may not occur until after the tax return due date. 

I'm not saying you actually have tax issues. that has to be determined by someone that can look over the entire activity and get answers to questions that they think are relevant

[Rick19744]

I agree with @Mike9241 in that you need to have a one on one consultation with a tax professional.

You do have several issues that need to be understood.  A few comments:

• It's not clear on what "last year" means. 
  • Does that mean you filed a 1065 for 2020 and you elected to be taxed as an S corp for 2021?
  • Or does that mean that you filed a 1065 for 2021 and elected to be taxed as an S corp for 2022?
• If you made an S election, then you are an S corp until the election is terminated.
• You should not file an 1120-S return until you have received confirmation from the IRS that the S election has been accepted.  Once again not clear on when elected.
• If the S election has been accepted, in order to return to be taxed as an LLC (partnership form 1065), you would need to liquidate the S corp.  This means that all property is deemed to be sold at FMV and tax would need to be paid in the current year as any gain would be reported on the final 1120-S and applicable shareholder K-1.
• The S corp will require reasonable wages be paid which will require payroll tax filings.

Needless to say, all of the issues are best done face to face as this forum is not conducive to providing assistance to numerous issues and inter-related issues.