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Old 12-16-2011, 05:33 PM
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Taxes on C-Corp

So I filed for incorporation in New York late July 2010. I was in Europe - and since then I had so many things I returned to - I totally forgot about the corporation.

I checked the NYS Treasury Website - and they say my corporation is still active. Yet, until last week I hadn't done ANYTHING with it.

I actually would like to start using it as a vehicle. And my next steps are to open a bank account.

I have three questions:

1. Because I realized that I will be double taxed as a C-Corp - is there anything I can do to reform as an S-Corp - even though the deadline has passed?

2. What are the taxes I am liable for as a C-Corp if I plan on using the corporation as an investment vehicle? If I grow capital to a significant amount... is it just capital gains I am having to pay - or do I have to pay income tax on capital gains.... so am I going to have to pay capital gains + income tax if the income is from investing?

3. I will have an employee in another country. What will I need to do with regard to taxes when paying my employee?

And any other suggestions, insights or advice you might have is most welcome!

Many thanks,

Teddicus



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Old 12-17-2011, 02:15 AM
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“1. Because I realized that I will be double taxed as a C-Corp - is there anything I can do to reform as an S-Corp - even though the deadline has passed? “---->Yes, you can convert an C-Corp into an S-Corp; the election to be treated as an S corporation needs to be made by the 15th day of the third month in the tax year. Most S corporations use a calendar tax year, so, in practice, the S election deadline is March 15. In other words, in order to be an S corporation for the 2012 tax year, the business needs to file its election by March 15, 2012. So, that's the rule. While the tax laws are very clear on this deadline, it turns out that you often can make a late election if you've got a decent excuse. You must have an eligible entity in place for making the election. For example, you might be able to get the IRS to grant you a late S election that goes back six or twelve months.
The major problem is the built-in gains tax.However, I guess as you said, even though your C corp is still active, you hadn’t doen anything with your C corp until last week. Then you have no profit at ALL. So, you are NOT going to have built in gains taxes(Remember, that the BIG tax is only due if the net recognized built-in gains is actually realized. Plus, it is limited by net income tax as if taxed as a C Corporation. This means that if you never have net income as a C Corp over the 10 year period, there will not be any BIG tax due for your S corp) but also, NO undistributed profit(s) will show up on the your k-1(s) at the end of the year and wouldn’t be taxed. I guess you need to contact the IRS for more information.
“2. What are the taxes I am liable for as a C-Corp if I plan on using the corporation as an investment vehicle? If I grow capital to a significant amount... is it just capital gains I am having to pay - or do I have to pay income tax on capital gains.... so am I going to have to pay capital gains + income tax if the income is from investing?”-----> C corporations are taxed as legal entities in their localities, assessed at the current corporate tax rate. Owners of C corporations also suffer double taxation, because the corporation itself is taxed as well as any dividends paid out to shareholders (taxed as individual income). Stock sales may also be taxed if the sale of the shares results in a net gain for the shareholder.Many experts advise unless you are planning on going public or have hundreds of stockholders, you do not need to form a C Corp to begin with. You need to use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about converting to an S Corp. If you sell your company within a 10 year period of converting to an S Corp the sale can be taxed as if you were still a C Corp. The assets that are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Unlike individuals, C corp receive no special tax rate treatment for capital gains. C corp MUST include the full amount of CGs in its regular taxable income. C corp records CGs separately from other income because capital losses can be deducted only from CGs. Any CLs in excess of CGs are carried back 3 years and forward 5 years to offset CGs in those years. C corp treats all CLs carryovers as STCLosses.
“3. I will have an employee in another country. What will I need to do with regard to taxes when paying my employee?”-----> You can deduct foreign EE compensation, wages and salaries on 1120S line 8;however, Federal withholding and FICA taxes are NOT withheld from the foreign EE’s paychecks.You do not need to withhold FICA tax from the foreign EE’s paycheck UNLESS the foreign EE is either a US citizen or US resident for tax purposes, he/she is NOT subject to US soc sec tax.Since the EE is not a US person and work done is not US source work, then he won't be declaring it on a US tax return. You will not issue anything to the EE. Not a W-2, not a 1099-Misc and not a 1042-S.You treat it like any other payment, but you must show due diligence in ascertaining that the EE is in fact not covered by US withholding requirements. The foreign EEdoes NOT file a W8-BEN as there is no beneficial interest in the US income. W8-BEN is ONLY used where there is a beneficial interest, such as when the foreign taxpayer has an ownership interest in the US company or performs services in the US.As you can see, nonresident can never be a shareholder of US S corp; shareholders must be U S persons,i.e, American citizens, residents or US residents for tax purposes.


Last edited by Wnhough : 12-17-2011 at 02:27 AM.


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