Recharactarization of 1099 Income

[dawh]

I have a client that set up an LLC on 05/05/2020, that we are filing a late 2553 Election. His prior accountant didn't make the election, or really advise him about much of anything except that he should create an LLC.

With that being said, the companies he worked for issued 1099s in his individual name, and not the name of the LLC, which it should have been had his accountant given him the correct advice when mentioning the LLC.

I started working with him about a month ago and he definitely benefits from S-Corp status, filing the late election, and re-categorization of Income to the S-Corp, paying FMV salary, etc. etc.

Since the 1099s were issued to his personal name, and not the LLC, this will create a reconciliation discrepancy with the IRS if we reduce the amounts that should have been attributed to the S-Corp vs. the amounts that would fall under his Schedule C (prior to 5/5/20).

I am considering my options, and I'm unsure if I should understate the amounts of the 1099s on the Schedule C, and include them on the S-Corp return, or, if I should include the full amount on the Schedule C, and take a deduction for the amounts that were included in the S-Corp. The net result is the same, however, this creates a large overstatement of gross income on his Schedule C, and an overstatement of expense, as the amount re-categorized to S-Corp income is a deduction on the Schedule C.

I understand that it would be much better to have the company in question amend and resubmit the 1099s for 2020, but I think it will be highly unlikely we could make this happen.

Any input is much appreciated as I do not want to be too aggressive and lead to issues in the future.

[sewcpa]

or a third option is that he operated during 2020 as a self employed (Sch C) and only had an empty shell of a company (LLC). [yes I know the default is a Sch C ] 

But it sounds like he might not have been using the LLC-depends on contracts and which bank accts etc

And then get the late election into S corp so that future years can both file and operate as Scorp.

[qbteachmt]

"With that being said, the companies he worked for issued 1099s in his individual name, and not the name of the LLC, which it should have been had his accountant given him the correct advice when mentioning the LLC."

As an Individual with a Single-member LLC, as a Disregarded entity, the customer of your client did it just right. Your client would fill in the W9 as the individual's name, optionally also use the dba, and the owner's SSN or EIN.

"would be much better to have the company in question amend and resubmit the 1099s for 2020"

They didn't make any error. In this scenario, that 1099-NEC is not for the business entity as separate from that owner, in other words. And now, he needs to submit a new W9 if he expects 2021 to be reported properly; well, not reported, by his customer.

"filing the late election,"

Late for 2020 or Late for 2021? They're both late, but if there was no 2020 payroll, it's hard to show they acted "like" a corporation.

"or, if I should include the full amount on the Schedule C, and take a deduction for the amounts that were included in the S-Corp."

It's not Expense. It wasn't paid out for goods and services. You are asking to allocate it to the other entity; not to Expense it.

"depends on contracts and which bank accts etc"

Exactly. Is there a Checking account for that EIN, or is it all running through a "personal business" checking account?

Review 2020. As they say, if it walks like a duck and quacks like a duck, it was a duck, in 2020.

[BobKamman]

Winner of this month's "Trying To Make a Silk Purse from a Sow's Ear" Award.  

(And it's only the second day of the month . . .)

[dawh]

I understand it wasn't inaccurate. However, if we make the S-Election, backdate payroll, etc., then we run in to the issue of the 1099 being issued to him/his disregarded entity which now would be incorrect.

I am asking to allocate it to the other entity, yes, however, I know this will lead to reconciliation discrepancies when his Sch. C for part of the year doesn't reconcile to the entire 1099 amount. The entity name was not listed on the 1099s, as his accountant failed to instruct him to submit updated W-9s after the LLC was formed (which I understand, IF operating as a disregarded entity wouldn't matter much).

There is a bank account for the LLC that was utilized.

[dawh]

Winner of the "I make assumptions without gathering complete information" award.

Grow up.

[dawh]

He utilized LLC bank accounts. Never submitted an updated W-9 to reflect updated information with the LLC name. LLC was active, accounts utilized, etc.

[qbteachmt]

"Never submitted an updated W-9 to reflect updated information with the LLC name"

Which doesn't matter. The change to being treated as a Corporation will matter. Or, having multiple partners in the LLC would matter.

[dkh]

I agree with @sewcpa - you should consider option#3  and @qbteachmt  - sounds like it was a "duck" in 2020

Work with what happened in 2020 instead of changing it to what you wanted it to be.

[IRonMaN]

"Winner of the "I make assumptions without gathering complete information" award.

Grow up."

At Bob's age, I'm pretty sure he is as grown as he is going to get.  So the alternative is to lighten up a little.  Being too serious in this profession isn't good for your health ------------------ you need to smile at least once a day (more often is preferred - the once a day is the minimum required dosage).

[BobKamman]

LIghten up, Ironman.  Appreciate the irony of someone failing to give complete information, then criticizing a response because it was purposefully omitted.  

[sjrcpa]

BTW. How do you know the prior accountant didn't give him correct instructions that your client ignored?

It's easy for a new client to throw the old accountant under the bus. There's two sides to every story.