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Old 12-07-2010, 10:26 PM
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Profts on C Corp

My C corp has made profit for past 3 years. Now I have moved back to Job. Should I convert this to S corp.

What happens to the profit of about of 50 K which i made. Will I Have to pay Dividend Tax on it or do I have other options and contue this as a C corp and write off expenses for next 3 years and close the corp

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Old 12-08-2010, 07:09 PM
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Converting a C Corporation to an S Corporation has merit as you would then not have to pay double taxation. (Please refer to the discussion below). Now, if there are prior years retained earnings, these should be withdrawn in the form of dividends.

However, if you envisage that your corporation is going to lose monies in the future, perhaps, you might wish to discuss this point with your CPA to determine whether you should elect to carry back these losses to recover prior years corporation taxes paid, if any. Alternatively, you may wish to convert to an S Corporation and take advantage of S corporation losses as reported on the K-1 that would flow to your personal tax return, where you can utilize these to offset against your regular taxable income.

If I understand you correctly, if your C Corporation made a $50,000 profit in 2010, then, clearly you would be subject to Corporation Tax on this amount.
I am estimating that for the tax year 2010, the 1120 Federal C Corporation tax liability would be approximately $7,500 (plus possible penalties and interest).

Making a dividend distribution will not affect the taxable income, and so, this situation is not very desirable as the residual profit (profit less corporation taxes) would be distributed to you the shareholder via a dividend distribution, which again would be taxed to you on your individual income tax return.

However, if you take a payroll that would be close to the amount of profit, I would think that this deduction would enable you to escape the double taxation. But, the payroll would be subject to payroll and federal and state income taxes. But, at least you would escape paying double taxation on this income.

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Ask TaxGuru Please refer to the legal disclaimer.

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Old 12-09-2010, 10:09 PM
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Let me clarify in much detail my scenerio and would appreciate your advice.

C corp has a profit of over 100K for past 3 years. For the year 2009 tax return the corp was converted to S corp. Which in fact I came to know only when I filed 1120 form for the year 2009 last mth.

I belive it is out of question for me to pay salary. But do you think I can pay dividend on 2009 tax return when filing the form 1120 s and amending personal return for S corp Loss.

Question is how should I show the dividend is paid for 2009? Do I have to file form 1120 also. Please guide me.

Thanks for your help in educating me.

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Old 12-10-2010, 05:06 PM
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“Should I convert this to S corp.?”------>I guess it basically depends on your specific personal business or taxation situation. However, formalizing the structure of your business may be able to bring significant business benefits in fields of liability and taxation and also image and credibility of your business as well. Before you choose a specific type of corporate structure, you need to understand the various types and their upsides and downsides .In general, the Subchapter C Corporation is the most common type of corporation and definitely one to consider when adopting a formal organizational structure. One of the downsides of a C Corporation is facing double taxation if the company issues dividends. On eof the chif advantages of regular C-corp, as many people acknowledge, is that as a formal corporation, C- corp. may be able to make it easier to raise capital and attract investors. Although S corporations can provide significant tax advantages over C corporations in the right circumstances, there are a number of potentially costly tax problems that you should assess before making a decision to convert your C corporation to an S corporation.
.” What happens to the profit of about of 50 K”------->I fyou convert your profits from C corp to S corp,In principle, as stated by the IRC # 1374, regular corporate tax rate, 35%,isusually imposed on line #19 of Sch D of 1120S on S-corp’s income or gain recognition to the extent of unrealized appreciation in a corporation on the date it switched from C to S status. The built-in gain tax is computed by applying the highest corporate tax rate, 35% as you know, to the net recognized built-in gain for any taxable year beginning in the recognition period; the period the 10 calendar years (not the 10 taxable years) beginning on the first day the corporation is an S corporation. Accordingly, you can avoid the BIG Tax if the unrecognized built in gain is not recognized until after the tenth year as an S corporation. Seriously, if your C-corp. is cash basis and carries A/R, then FMV of your A/R at the time of conversion ‘d be subject to high BIG ta x rate; As the A/R is paid after the effective date of the S election, the revenue from the payment of the A/R is treated as a recognized built-in gain. Then your S corp. pays BIG Tax at the highest corporate rate, as sad above, based upon the recognized built-in gain. However, the amount of the BIG Tax is a deduction for you, as a shareholder. It reduces each income item reported on your Schedule K. The common planning technique if a BIG should be necessarily recognized prior to the tenth year is to have the corporation create a net loss for the year. The rule is that BIG Tax is calculated on the lesser of the amount of the recognized BIG or the corporation’s taxable income if the S corporation was a C corporation. So assume that your taxable income is $0 due to NOL in 2011 ( after the conversion into S corp. from C corp.) , and also assume that your taxable recognized BIG amount is also $50,000; then, as BIG, $50,000>$0, taxable income in 2011. So, your taxable BIG is $0 in 2011. Another aspect that you need to remember is that if your s-corp. recognizes BIG but does not have taxable income until following the tenth year, then your S-corp. avoids the BIG Tax.

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