Client started business 08/03/2017 with schedule C in 2017.His CPA hasn't filed 2553 & S corp return in 2018. Can I efile late 2553 attached with first S Corp return now?

[xuan150279]

Client has 5 employees with W-2 and then switched to 1099-MISC in 2018. The owner didn't have 1099-MISC or W2. It is LLC with EIN. I faxed 2553 with relief request. Should I wait for IRS approval or efile PDF signed 2553 with first S corp tax return.

[TaxGuyBill · Accepted solution]

No.  No, no, no, no.

"Client has 5 employees with W-2 and then switched to 1099-MISC in 2018"

If the client has employees, they NEED to have a W-2, NOT a 1099-MISC.

"The owner didn't have 1099-MISC or W2"

If it is taxed as a corporation and if the owner took out money for personal use, the owner NEEDS to have have been on payroll with a W-2.

"I faxed 2553 with relief request"

What was the "Reasonable Cause" for not filing the 2553 on time?  There must be "reasonable cause" for not filing it on time, such as the owner thought it was already filed.  You can't file it late just because it sounds like a good idea.  So that includes ACTING like a corporation (because they thought it was already filed), such as the client being on payroll with a W-2.

"Can I efile late 2553 attached with first S Corp return now? ... I faxed 2553 with relief request"

If you already filed the 2553, why would you file it again?

Because there are many questionable things going on here, I certainly would not file without the IRS acceptance.  Although there could be more information that you have not told us that could change things, if the 2553 had not already been filed, I don't think I would even try to file a 2553 because it doesn't seem like they qualify.

[xuan150279]

Thank you for your information. I really appreciate it. Please tell me why you think that this client doesn't qualify to be taxed as Scorp and would not have filed 2553?

[sjrcpa]

Is the business a single member LLC? You didn't mention. Also, as Bill stated, you need a good reason to have a late S election accepted. You haven't stated one.

[xuan150279]

yes, it is a single member LLC. the good reason to have a late S election on 2553 is the client didn't know that until now. the former CPA hasn't told him that. Just tell him he needs to do W2 and then he did W-2 for his employees for 3 months and  changed his mind and switched to 1099-MISC. That is the part I am worried a lot. Thank you for your response. Please advise me what I should do?

[sjrcpa]

Why do you think an S Corp is the better option? I think I'd stay Sch C for 2018; have the client get everything in order (such as W-2s for employees) and consider S election for 2020.

[xuan150279]

I think S Corp fit b/c his income is triple than last year. I faxed 2553 with relief request to IRS a weak ago and wait for approval. If I go ahead and file Sch C for 2018, and then a month later, I receive IRS accepted letter to be S corp, is it complete a mess? What do you think about this situation, thank you very much

[sjrcpa]

I think it is a terrible situation. I would wait to hear from IRS before filing anything.

[xuan150279]

thanks for your help. I appreciate it 🙂

[TaxGuyBill]

"the good reason to have a late S election on 2553 is the client didn't know that until now"

What does that mean?  Did the client THINK it already was being taxed as a S-corporation?  I don't think just 'not knowing' what is required is a reasonable cause, and I suspect the IRS could deny it for 2018.


"I think S Corp fit b/c his income is triple than last year"

That doesn't necessarily mean a S-corporation is better (especially with the §199A deduction now).  However, more importantly, it goes back to what the client thought was happening.  If YOU just decided NOW that a S-corporation is a good idea, then the late election is NOT valid because the client was not treating it as a corporation.  Again, the late election generally only applies if the client has acting like a corporation.  Was a S-corporation extension filed before the March 15th due date?  If not, it seems even less likely that the client has been treating it as a corporation.

[xuan150279]

Thanks for your advice. The client didn't know any thing about S Corp or Corp with the former CPA. He knew that after I explained to him about it.  The former CPA hasn't done any extension filed before March15th due date. I faxed 2553 with relief request to IRS and wait for approval. I don't know if the late election to be S Corp is valid or not. Can you explain to me what requirement for late election be S corp is valid? I really appreciate it.

[TaxGuyBill]

As I said above, the business must have INTENDED to be taxed as a S-corporation and have "Reasonable Cause" for not filing the election on time.  From you are said, the business did NOT intend to be taxed as a S-corporation until you told him about it, and I don't see any "Reasonable Cause" for not filing the election on time.
https://www.irs.gov/businesses/small-businesses-self-employed/late-election-relief

[qbteachmt]

S Corp = everyone working for the business would be an employee and get payroll and W2; even the shareholder(s). LLC filing 1065 (partnership) or as Sched C (only that one owner) = there is no provision for that owner/partners to be paid through payroll (it's not permitted). If you file as S Corp, and the owner never got paid through payroll, that is another large mess you would be creating.

[xuan150279]

Thank you very much for all your help.

[qbteachmt]

The "owner" never gets a 1099-Misc from their own entity.