First Year S Corp in 2018 Worked both W2 and 1099 (Corp-to-Corp)

[trailingedge22]

In 2013 I stopped working due to a "mystery disease".  In 1984 I was disabled in an accident and considered to be totally and permanently disabled and given SSI.  Just the same I returned to work in electronics, got a BSEE degree then worked as an Electronic Hardware Engineer until 1999 when I started working contracts exclusively until 2013 when I was put back on disability (SSDI) due to the mystery disease.

Before getting diagnosed with a yet to be named autoimmune disease, I started an LLC so that I could buy used laptops in bulk, refurbish them and sell them on eBay.  ( Microsoft will give you low-cost Windows licenses, but you have to be a business.)   After getting diagnosed and starting effective treatments I decided to make the business an S Corp on 01/01/2018 and hit the bricks to get work.  

The goal was and still is to eventually develop and sell my own IP or work on custom projects, but that would require capital and experience with the latest technology which would only come by working contracts again.  It took a lot of money and effort, but I was able to land a W2 contract in August.  

I was trying to get a Corp-to-Corp (1099) contract but after 5 yrs on the bench, I was lucky to get the W2 contract which is not income to the business.  In December I landed a Corp-to-Corp contract and the S Corp took in < $5k for the year.  I continued to work the contract through October 2019 and left for a better opportunity working another 1099 contract which ended In April during the COVID madness.

In early 2018 I had to enlist the help of HR Block to deal with IRS problems regarding 2017 IRA distributions which I was completely entitled to take.  With all that and just being too busy to deal with this new S Corp thing, I never filed 2018.  It was just too confusing and the work at FLIR consumed all my mental energy as it was a crucial contract for the priceless experience as well as the very much needed income.

Now that there is time to process all of this, I am trying to file 2018 and then 2019.  I have Excel spreadsheets for both years with the expenses still being sorted out into their respective buckets as I learn the intricacies of operating and filing taxes for an S Corp.

So here's where I stand.  In 2017 & 2018 I spent a good deal of $$$ getting this S Corp off the ground.  Computer equipment, electronic components, instrumentation, and much travel meeting with old colleagues and managers before landing the W2 contract nearly 3,000 mi from home.   I was still getting disability payments and the W2 money all going to my personal income.

Should I or better yet, can I deduct the travel and other expenses from up to the date I started the W2 and then the interim btw the W2 and Corp-to-Corp contract?   I'm 99% sure I need to do the 1120s for that last quarter of 2018 when the S Corp was the recipient of the contract $$$.  Is there anything special about the first year of doing business as an S Corp?   I spent more money than I made for sure in 2018, yet it seems I'm in danger of actually owing the IRS and facing some harsh penalties.

The 2019 return is partially done, but 2018 needs to be finished first.  All of the expenses in the 3rd qtr are needed to go for the W2 contract out in CA.  (I believe I am legally obligated to keep the expenses from the W2 completely separate from the S Corp.)  The Corp-to-Corp contract was ~300 mi from my residence and deductions should annihilate what little income the company took in. 

What if I take a loss in 2018 on the business side?  Can this help me in 2019 where all income was to the company side?...

...I think I'm going to be sick.

[tagteam · Accepted solution]

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@trailingedge22 wrote:

....it seems I'm in danger of actually owing the IRS and facing some harsh penalties.

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Yes, that is a distinct possibility since an S corporation must file a timely Form 1120-S as long as the election to be treated as an S corporation remains in effect.

See https://www.irs.gov/instructions/i1120s#idm139641016872208

There are penalties for late filing of an S corporation return.

See https://www.irs.gov/instructions/i1120s#idm139641016304688

You need to seek professional tax counsel as soon as practicable. You may still have other options at this point, but you need to discuss the possibilities with a tax professional (link below).

https://taxexperts.naea.org/

[trailingedge22]

The S Corp took no assets in until the last month of the last quarter and once I filed the 1120S there was a loss for the year, therefore no taxes due.   Zero FICA and Xero State and Fed income tax.   

It was a big nothing burger.  No reason to try and scare the bejesus out of me.

I wasn't terribly worried.  It was a matter of whether my losses for the year were eligible as deductions and whether they would swamp out the $$$ I took in on the W2 contract and the disability SSDI checks which roll in for 9-months after you return to work (which wasn't until the third quarter.)

Now all I need to do is get the 2019 one finished and I'll be just fine.

I was actually hoping someone could answer my question if taking a loss in the first year might help with the next year's tax burden.  I'll have to learn by going through the process I guess.  It's better that way anyway.  All of the work is getting your expenses all in the right buckets.  This is a small, one-man business and with some experience, my organization skills will improve and the Excel spreadsheet I've worked so hard on will line up with data to be entered into TurboTax.

One thing for sure is that I won't be posting here for advice anymore.   A link to the IRS 1120S instruction page, really???  You think I don't have that doc permanently open since I started this project last week?  That's like asking a question about gravitation redshift and being handed a modern physics textbook.

[tagteam]

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@trailingedge22 wrote:

I was actually hoping someone could answer my question if taking a loss in the first year might help with the next year's tax burden. 

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The short answer is, "yes, you can deduct a net business loss (such as one that is passed through to you on a K-1 from an S corporation) from your other income". 

Note, however, that you cannot carry that loss forward unless it results in an NOL on your individual income tax return.

Further, note that the late filing penalty applies whether the S corporation has net income or a net loss.

[trailingedge22]

" The short answer is, yes, you can deduct a net business loss (such as one that is passed through to you on a K-1 from an S corporation) from your other income...

...Note, however, that you cannot carry that loss forward unless it results in an NOL on your individual income tax return."

Thanks!

IRS Late Filing of 1120S  

"Late filing of return.    A penalty may be assessed if the return is filed after the due date (including extensions)...

... The minimum penalty for a return that is more than 60 days late is the smaller of the tax due or $435."

[tagteam]

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@trailingedge22 wrote:

... The minimum penalty for a return that is more than 60 days late is the smaller of the tax due or $435."

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Click the link in my previous post. The statement quoted above applies if there is tax due. Otherwise:

Late filing of return.

A penalty may be assessed if the return is filed after the due date (including extensions) or the return doesn't show all the information required, unless each failure is due to reasonable cause. See Caution, earlier. For returns on which no tax is due, the penalty is $205 for each month or part of a month (up to 12 months) the return is late or doesn't include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is more than 60 days late is the smaller of the tax due or $435.