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Old 06-21-2012, 10:43 AM
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New Corp electing S corp and personal capital gains

Here is my situation:
I started a newly formed Corporation on May 3rd 2012..I'm the sole owner/operator "employee".. I have not elected S corp status as of yet. In Feb 2012 I took out 80,000.00 from an inherited IRA and chose to not have any taxes taken out at that time.. I'm depositing 50,000.00 from this 80,000.00 inherited IRA into my new Companies checking account. I will definitely be using all of the 50,000.00 for start up costs before Dec. 31st 2012.. My business will not be making any profit at all for at least the first 12 months as it is/will be a very small electronics manufacturing Company and all money has to be used for prototyping new products only. I will also not be taking a salary from the business for the first year. My question is will 2012 be my first "short tax year" from May 3rd 2012 (the date I incorporated) through Dec 31st 2012? And will I be able to use the 50,000.00 invested for as a loss to offset my capital gains from taking out the $80,000.00 inherited IRA in Feb 2012? I'm a bit confused where the instructions for form 2553 mention having to file within 2 months and 15 days etc....



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Old 06-21-2012, 05:35 PM
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“I started a newly formed Corporation on May 3rd 2012..I'm the sole owner/operator "employee".. I have not elected S corp status as of yet. “---->An understanding of various business types can mean the difference between owning and investing in the right or wrong business venture. Sole proprietorships, SMLLC's/MMLLCs and S Corps are quite different, and the choice of one over the other will most likely be determined by the type of business you want to open, as well as the type of control and liability you want to have. You own a sole proprietorship. Sometimes this means that you work independently, but you also can have employees. Any profit or loss on a sole proprietorship goes directly to the owner, you, meaning that you are responsible for all taxes incurred by the business. This also means that you have control over all of the profit. Your sole proprietor holds sole liability for any legal issues arising from your business. This means that if the business is sued for any reason, you take legal responsibility.
“In Feb 2012 I took out 80,000.00 from an inherited IRA and chose to not have any taxes taken out at that time.. I'm depositing 50,000.00 from this 80,000.00 inherited IRA into my new Companies checking account. I will definitely be using all of the 50,000.00 for start up costs before Dec. 31st 2012.. My business will not be making any profit at all for at least the first 12 months as it is/will be a very small electronics manufacturing Company and all money has to be used for prototyping new products only. “---->As a sole proprietor you must report all business income or losses on your personal income tax return on Sch C(as long as the amount on Sch Cline 29/31 is $400 or exceeds $400), which you will submit to the IRS along with Form 1040; the business itself is not taxed separately. You may deduct many of the costs of starting your business, listing them as expenses to offset the income your business earns. Start-up expenses are purchases and expenditures made before you open your doors, preparing your company to begin providing its products and services. During 2010, the IRS allowed start-up companies to deduct up to $10,000 of start-up costs on your first years' tax form; during prior years this figure was $5,000. These are reduced if you have more than $50,000 of start up costs.


If you are going to have to depreciate some business startup costs, you may want to delay purchases that can be put off until after your business opens. The same purchase made after opening could be written off in full in the first year instead of having it depreciate over 15 year. If you choose to amortize your costs over time instead of deduct in the first year, you need to file a statement with your tax return that describes the business, when it began, the nature of each startup cost and the amortization period you'll use. You must also file Form 4562. If you are deducting startup costs, you can report them on Schedule C/ C-EZ of Form 1040, depending on the nature of the startup costs. A net operating loss occurs when your sole proprietorship's expenses exceed its earnings. The easiest way for a sole proprietor to determine if she has one is to complete her tax return. If the AGI amount she enters on Line 41 of her IRS Form 1040 is a negative number. If expenses exceed income, you must determine whether or not the loss is deductible. In figuring the deduction, you must exclude deductions for personal exemptions, capital losses that exceed capital gains, gains from the sale or exchange of qualified stocks(if youhave), nonbusiness expenses that exceed nonbusiness income, the net operating loss deduction and the domestic production activities deduction(if youhave), among others.You figure the loss using IRS Form 1045 Schedule A.NOL carryovers allow you to apply the loss to a different tax year to deduct the loss and reduce the income for the year to which she's applying the loss.You may carry back, or apply the loss to your earnings from the two tax years prior to the net operating loss year. You may also carry the loss forward and use it to offset up to 20 years of future earnings. In either case, the offset earnings may come from the proprietorship that suffered the loss, another proprietorship the same individual owns or from employee wages.
“I will also not be taking a salary from the business for the first year. “---->As the owner of a sole proprietorship you're not considered an employee of your own business. This means you don't receive a paycheck or W-2 Form or have taxes withheld from your self-employment income. Withdrawals of cash or property out of your sole proprietorship for your own personal use are called draws.A draw represents a reduction of business capital; it is not a deductible business expense.You should set up a Drawings account in your books to keep track of your withdrawals. If you take cash out of your business and use it for business-related items, get receipts. You'll need them to support your deductions and to record the amount of the expenses in your books.
“My question is will 2012 be my first "short tax year" from May 3rd 2012 (the date I incorporated) through Dec 31st 2012?”----->Correct; as you were not in existence for an entire tax year, 2012, from Jan 1 2012-Dec 31, 2012. A short tax year is a tax year of less than 12 months. Even if you were not in existence for the entire year, a tax return is required for the time you were in existence. Generally, individuals must adopt the calendar year as their tax year. Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year ,12 months, ending on the last day of the short tax year.
“ And will I be able to use the 50,000.00 invested for as a loss to offset my capital gains from taking out the $80,000.00 inherited IRA in Feb 2012?”---->It depends; capital gains are treated differently from ordinary income. Capital gains can only be used to offset any capital losses you incurred when you sold an asset for a lower price than you originally paid. If you do not have any capital gains, you cannot deduct capital losses on your tax returns. This is NOT your case, however, in the case of a C corp, yes; capital gains are shown on page 1 of Form 1120 and are used in full to determine net gain or loss as net capital gains are included on page 1 as ordinary income.However,the significance of a Traditional IRA is that when you receive the funds, the assets will be added to your gross income unless the original IRA owner was your spouse. If the original IRA owner was not your spouse, the distribution may increase your marginal tax rate as well as your gross income if the inheritance is large enough.In this case, as long as you can decrease your taxable by claiming your start up costs on Sch C as other expesnes on nyour return.



“ I'm a bit confused where the instructions for form 2553 mention having to file within 2 months and 15 days etc....”----> You need to notify the IRS of its intention to be taxed as an S-Corp by filing IRS Form 2553 no later than the 15th day of the third month, by Mar 15 th, following its date of incorporation. For example, assume that a calendar year small business begins its first tax year on January 7.2012. The two month period ends March 6 and 15 days after that is March 21. To be an S corp beginning with its first tax year,2012, the corporation must file Form 2553 during the period that begins January 7 and ends March 21.2012 Because the business had no prior tax year, an election made before January 7 will not be valid. Another example is assume that on MAr 1 2012, a calendar year busiiness files Form 2553 with the IRS to elect S corp status.Because the election is filed before Mar 15 2012, it normally would be effective retroactive to Jan 1 2012. An election filed after Mar 15 2012. wouldn't be effective until JAn 1 2013.


Last edited by Wnhough : 06-21-2012 at 06:40 PM.


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