PROBLEM SITUATION

An individual and his partner organized a new corporation in October and immediately began conducting business. While meeting with their attorney, 3 unsettling problems were discovered.
1. His partner had not filed the required election form to make an "S" election. 2. The corporation had received a big contract the previous November and was now facing a large income tax liability at corporate rates in addition to substantial interest and penalties.
3. He discovered that it was now also too late to make an "S" election for the current year.
They had avoided the issues by not filing their corporate income tax returns. Their attorney advised them to see a CPA and resolve the tax issues. They came to our office in December and asked for our assistance.

JOSEPH BOLAND, CPA, PC SOLUTION

We advised the client that as the corporation was new, it can elect a year end other than December. We advised the client that the company was incorporated in October so elect a September 30th year end for the first return. By choosing a September 30th year end (instead of the usual December 31st), the return is not due until December 15th of this year; thus, avoiding the interest and penalties for late filing of tax returns and late payment of taxes. A September year end also meant that it was now not too late to make an "S" election for the current year. Another benefit, a corporation must normally elect a December year end if it makes an "S" election. Therefore, the company files its first tax return on time as a "C" corporation and then makes an "S" election going back to the traditional December 31st year end. A classic example of "having your cake and eating it too".

RESULTS EXPERIENCED BY CLIENT

The client avoided interest and penalties for late filing. The client was also able to save substantial corporate income taxes in future years because the company was now an "S" corporation and no longer subject to federal and state corporate income taxes. The total federal and state corporate income tax savings for the initial year was $15,500.00.