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S-Corp with 2 different activities - Close or combine?

dude7707
Level 4

T/P starts Organic Mushroom business with following:

1.  Has not filed 1120S for 2020.

2.  Original S was for IT consulting - No Income in 2020 so T/P decided not file S.

     Note:  Has filed all prior years, which started in 2016.

3.  Purchased equipment for OM in 2020 and entered on Sch F - other activity from other farming.

My recommendations:

1.  File 1120S to avoid further late filing penalties - currently owe $410 for 1 sh.

2.  Remove OM equipment from Sch F and report on LLC and file as Sch C and don't depreciate until OM begins business which I am told will be in 2021.  Or setup as NEW S?

3.  Terminate Original S at end of 2020.

Thoughts/comments - given limited info.

 

 

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8 Replies 8
dkh
Level 11

My recommendation - don't take this taxpayer on as a client.   

I very much dislike taxpayers that create a huge mess of things then want someone to clean up their mess. 

But if you are so inclined to work on this -    I would consider leaving the SCorp open and using it for the Organic Mushroom .   Is taxpayer only shareholder in  S Corp?    Will this taxpayer be willing to do a payroll if SCorp remains active?   If no, then definitely go with the LLC.

dude7707
Level 4

Is taxpayer only shareholder in  S Corp?  - Y - It's H & W only  - 50/50 

 

Will this taxpayer be willing to do a payroll if S Corp remains active?  Good Q, will advise the options as you stated.   

 

If no, then definitely go with the LLC.  - Agree.

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qbteachmt
Level 15

"Is taxpayer only shareholder in  S Corp?  - Y - It's H & W only"

Are you in a community state? Because you just named Two Shareholders. Remember; if they Both Work for the S Corp, they are Each Employees.

You must pay more attention to these details.

"If no, then definitely go with the LLC.  - Agree."

You don't need an LLC for that operation.

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dude7707
Level 4

"Is taxpayer only shareholder in  S Corp?  - Y - It's H & W only"

Are you in a community state? - Y

Because you just named Two Shareholders. - See below - but note that he or she is actually NOT a shareholder, if does not materially participate in business.  

Spousal Designation on Your Form 2553 S Corp Election

If you decide to have your business taxed as an S Corp, you must file a Form 2553 with the Internal Revenue Service (IRS). The tax code states that anyone with a community interest in the stock must consent to the tax election, and Form 2553 will ask for a list of all the business owners. If your spouse can claim community property interest, it seems logical that he or she should be listed on this form, right? But if they are not technically an owner, they shouldn’t be listed as an owner, right? So how do you comply with these conflicting ideas?

The answer isn’t obvious, but the correct way to do it is to list your spouse in the shareholder section of the form, but note that he or

Spousal Designation on Your Form 2553 S Corp Election
If you decide to have your business taxed as an S Corp, you must file a Form 2553 with the Internal Revenue Service (IRS). The tax code states that anyone with a community interest in the stock must consent to the tax election, and Form 2553 will ask for a list of all the business owners. If your spouse can claim community property interest, it seems logical that he or she should be listed on this form, right? But if they are not technically an owner, they shouldn’t be listed as an owner, right? So how do you comply with these conflicting ideas?

The answer isn’t obvious, but the correct way to do it is to list your spouse in the shareholder section of the form, but note that he or she is actually NOT a shareholder. Yes, that’s right – as you list all the owners and their information, include your spouse in this list and get his or her signature. The difference will be that unlike the actual owners, you will not list any ownership percentages or shares or any dates those shares were acquired next to your spouse’s name. Instead, you will note that he or she is a “consenting spouse,” and that he or she owns 0% shares of the business. Although a little convoluted, this solution satisfies both requirements of their affirmative consent without claiming any ownership where there is none.

Yes, that’s right – as you list all the owners and their information, include your spouse in this list and get his or her signature. The difference will be that unlike the actual owners, you will not list any ownership percentages or shares or any dates those shares were acquired next to your spouse’s name. Instead, you will note that he or she is a “consenting spouse,” and that he or she owns 0% shares of the business. Although a little convoluted, this solution satisfies both requirements of their affirmative consent without claiming any ownership where there is none.

 

Remember; if they Both Work for the S Corp, they are Each Employees.

You must pay more attention to these details.

"If no, then definitely go with the LLC.  - Agree."

You don't need an LLC for that operation. If not LLC, than S-Corp?

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qbteachmt
Level 15

"If not LLC, than S-Corp?"

Why is S Corp your recommended alternative to "not necessarily LLC?" Your original question presents a false dichotomy. It isn't S Corp or LLC. It's broader than that.

If only the One Person is the business and is the legal entity "owner," then you might be fine with Sole Proprietorship. A single-member LLC is a State legal structure, not a Tax structure. You stated some liability issue was driving the LLC decision.

And, again, which of these two people works for the business? That's a big part of what you asked = how the work gets done and by whom.

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dkh
Level 11

qbteachmt   has important points to consider also.

 

BTW I'd still send them down the road.  My experiences with taking on clients that are a mess are - as soon as I've gotten things straightened out they decided that once again they can do their own taxes.

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qbteachmt
Level 15

You didn't give us a sense of scale. Gross revenue, typical costs for labor and materials, which types of assets, staffing requirements, property ownership?

You would not consider this the same corporation as the IT with a new or additional activity. The requirements, operational considerations and labor issues are significantly different.

For instance, you don't want to hold Real Estate in an S Corp, and IT operations won't include Tractors or EPA license for pesticide application.

"Or setup as NEW S?"

S Corp requires Payroll; is that mushroom operation of a nature that Corporate status even makes sense?

"Remove OM equipment from Sch F and report on LLC and file as Sch C"

What does "report on LLC" mean, and why would you consider Sched C instead of F?

Your tax payer can have all the different things going on; it doesn't all have to be under the S Corp, just because it is a Business.

"Thoughts/comments - given limited info."

You know more about all of this than strangers on the internet know. You might also seek legal input, including the differences in risk and insurance for each type of activity.

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"Level Up" is a gaming function, not a real life function.
dude7707
Level 4

You didn't give us a sense of scale. Gross revenue, typical costs for labor and materials, which types of assets, staffing requirements, property ownership? - Unfortunately I do not have any at this time, other than what is provided...this was just a general Q, which I realize cannot be answered accurately unless have specific info!

You would not consider this the same corporation as the IT with a new or additional activity. The requirements, operational considerations and labor issues are significantly different. - Agree 100%.

For instance, you don't want to hold Real Estate in an S Corp, and IT operations won't include Tractors or EPA license for pesticide application.

"Or setup as NEW S?"

S Corp requires Payroll; is that mushroom operation of a nature that Corporate status even makes sense?

"Remove OM equipment from Sch F and report on LLC and file as Sch C"

What does "report on LLC" mean, and why would you consider Sched C instead of F? what I was referring to is LLC taxed as disregarded entity.  T/P is concerned about personal liability, so, while not claiming to be a lawyer, feel Limited Liability Company would provide this, rather than opting to be S-Corp with all the additional requirements....taking reasonable salary, etc.

Your tax payer can have all the different things going on; it doesn't all have to be under the S Corp, just because it is a Business.

"Thoughts/comments - given limited info."

You know more about all of this than strangers on the internet know. You might also seek legal input, including the differences in risk and insurance for each type of activity. - Agree 100%, has current CPA for filing S, but further research and legal counsel is definitely the right approach.

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