Should I wait for response from IRS on 2553 before filing 1040x?

[GoHokies]

I efiled an 1120s this week with a 2553 election for 2017. I need to file a 1040x to move the business from schedule c to K-1. Do I need to wait for response from IRS on s-corp election before filing the amended 1040? 

Thank you! 

[TaxGuyBill]

I assume that this is a Single Member LLC that wants to be taxed as a S-corporation?

In my opinion, reporting it on Schedule C invalidated the retroactive S election.

One of the criteria for being eligible for making a "late" S election is that the business has been treated as a S-corporation.  That means wages and the associated payroll forms, and no Schedule C.  So that means if it was reported on Schedule C (which also likely means no payroll was done), the late S election can't be made because the business was not acting as a S-corporation.

[GoHokies]

Thank you for the response. I agree with you, but in this particular circumstance, the tax payer intended to be taxed as an s-corporation and was on the payroll for the entire year. He received a W2 at year end, although another accountant filed the 1040 with the schedule C. Do I wait 60 days to see if retro s election is approved or file the amended 1040x now as support for the tax payers intent?

[TaxGuyBill]

I think what you SHOULD have done is file the 1040X BEFORE you filed the 2553.  As it is now, when the 2553 was filed, they did NOT meet the requirement of the "entity and all shareholders reported their income consistent with an S corporation election".

As for what to do now, I don't know.  While filing the 1040X would support the intent, I personally don't think it is valid to do so.  Also, it is likely the the IRS decision for the 2553 will be done by the time the IRS processes the 1040X, so I don't think filing the 1040X would improve the case.

[itonewbie]

:+1:

[itonewbie · Accepted solution]

I tend to agree with Bill that it may be too late to make a late election for S corp.  Based on a plain reading of Rev. Proc. 2013-30, everything must be consistent with how records would have been kept and returns filed had the entity been an S corp from the effective date.  Also, and very importantly, the late election must be made by following the exact procedures prescribed in the Rev. Proc.  It is not clear, however, from your message that the election was made in this manner.

If you still believe that the failure was due to reasonable cause (e.g. because the taxpayer, who provided complete and accurate information to a competent tax adviser, had relied on the opinion in good faith to file the F.1040 with a Sch C), he may consider requesting relief by means of a PLR.

In the event you do take the route of PLR, I would make triple sure that the case is air-tight and review potentially contentious issues such as wages being reasonable before submitting the request as the IRS may scrutinize the details more closely than a regular filing.

[laceyh]

GoHokies,

I'm in a similar position with a client. How did this turn out for you?

[George4Tacks]

@GoHokies Do you have a resolution you would like to share?

[JMaxTaxMan]

I have a client for which I am exploring this option going back 2 or 3 years...and I don't think your response makes logical sense...(no offense intended). 

The only way it makes sense is if the tax payer had not filed any returns for his LLC (in this case the 1120s) AND either a) not filed a schedule C on his personal returns leaving out the business entirely for the year(s) in question or b) not filed his personal returns at all for the year(s) in question.  I don't think it makes reasonable sense that the IRS designed a way for only tax payers who were technically delinquent in filing their returns to get relief for failing to make an election while excluding those who tried to do the "then best thing" by filing something and being in compliance.

Plus, how can you possible file a 1040x to show that you intended to be treated as an S-Corp without the help of Doc Brown from "Back to the Future" since doing so (Filing the 1040x) would require you to have the K-1 from the LLC treated as an S-corp.   If you could get away with filing the 1040x, you'd already be standing on home base experiencing the benefit of an S-Corp without the need for approval from the IRS to be treated as an S-Corp.

I'm inclined (for selfish reasons) to interpret the sentence "entity and all shareholders reported their income consistent with an S corporation election" to mean that the shareholder's reported a "reasonable salary" and made the appropriate and timely tax deposits.

....admittedly I may be chasing my own tail here but I'm looking for answers too...

[Shelly Wins]

I have a problem on the opposite end of the spectrum. I setup LLC and filed for EIN and S Corp status Jan 2018 and continued to operate as a Schedule C business (no payroll setup.) Now I've done through 2018 and 2019 like this. I did file timely extensions for both the 1120s and 1040 for each year and paid sufficient amounts to cover taxes. However I don't know how to file now. I didn't pay myself wages and honestly didn't make enough in 2019 to do so even if I wanted to.  Total GROSS revenue 35k in 2018 and 12k in 2019. Expenses between 9-12k annually. I was going to ramp up the business but life took a turn. It is the only income that I make. How would you recommend I file at this point. Someone said to just put it on Sch C like I always did. However, that s Corp election is still out there. Thank you.

[sjrcpa]

You elected to be an S Corp. You need to file 1120S. 

[Shelly Wins]

Thank you for the response. 1120s with NO payroll? It's too late for me to even try to do payroll. 

[PhoebeRoberts]

It's not too late. It's just really expensive.