Discussion:C corp convert to S
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Discussion Forum Index --> Advanced Tax Questions --> C corp convert to S
Discussion Forum Index --> Tax Questions --> C corp convert to S
| 7 February 2008 | |
| Client's C has been losing lots of $ over past 3 years and sole shareholder had to loan 400k over this period all the while the previous CPA had him taking salaries. His FYE is May 31st. My thoughts are to do a short year to 12/31/07 and elect S for 2008. Any thoughts on this would be appreciated. Also NOL c/f is 150 and retained earnings is 125, no A/R and inventory is 100. Thank you. | |
| 7 February 2008 | |
| You mean $150, $125 and $100, not $150K, $125K and $100K, no? It makes a difference ... | |
| 7 February 2008 | |
| I think you would want to use up the NOL first before converting to an S - otherwise it gets frozen until reconversion to a C or when the S liquidates. That is, as KatieJ pointed out, if you're talking about an NOL of $150,000. If it is $150.00, who cares. | |
| 7 February 2008 | |
| I think it depends on the projections for the next few years. The NOL carryforward has little value if the corporation isn't going to have income to absorb it, while if the stockholder has other income (and basis) to absorb future flowthrough losses, there's a tax benefit to be gained from electing S. There will be some BIG from the inventory. Are there any other assets that are worth more than their inside basis? | |
| 7 February 2008 | |
| An S election begins the first day after the close the C corp year. The C corp would close its year on May 31, and the S corp would begin on June 1. The S corp would have the short-year, June-December. | |
| 7 February 2008 | |
| I don't see any reason why you couldn't file an 1128 to change the C corp to a calendar year (you have until March 15 to do that), and then make an S election effective Jan 1 2008 (you have until March 15 to do that too). | |
| February 7, 2008 | |
| I would immediately stop his salary until you zero out the NOL, then go S. | |
| 7 February 2008 | |
| JR1 is on the right track if it is the salary that is creating the NOL. | |
| 2 March 2008 | |
| The problem I have is putting all that on the 1120S under Schedule M-2. Per my hours of discussion with the IRS, they told me put 0 on the Balance at beginning of tax year cell under M-2. It did make sense since it was the company's first year as an S corp. But what about my Retained Earnings on my books that stands as a C corp R/E. It's all different now....History: As a C corp, retained earnings is -127,846.00, but when converting it to S, I have $36,364, since I started with zero. The $36K is the 2006 Net Income minues the non deductable items. My guess is that the 36K is my new Retained Earnings, and I have to adjust the books to match that. To make this match, I guess I have to make a journal entry. Or just carry-on with a C Corp financials and and Schedule M-2 S-Corp. Please advise. thanks. | |
RoyDaleOne (talk|edits) said: | 2 March 2008 |
| Work sheets, Work Sheets.... | |
| 2 March 2008 | |
| How about you set up a new RE account called AAA and start closing income to that account. Your old retained earnings account represents C corp E&P. I've never worried about retained earnings matching AAA on the 1120S and I've never seen it questioned. | |
| 3 March 2008 | |
| For an S corp that was a C in a former life and still has C corp E&P lying around, RE and AAA will NEVER be the same. | |
RoyDaleOne (talk|edits) said: | 3 March 2008 |
| I mean sometimes you have to kept track of information via a work sheet.
As, many other people have pointed out AAA and RE are separate animals. | |
| 3 March 2008 | |
| AAA is not a balance sheet account. I think that's where people get confused. It is not intended to be a substitute for the balance sheet retained earnings account. It's a way of keeping track of income that has been previously taxed to the shareholders and can be distributed without tax consequence. | |
| 11 March 2008 | |
| thanks so much for your guidance. I will look into it and see what I can do. The fact that I don't have to make sure it matches with the Balance sheet makes me feel better. But how about the books. My books balance sheet has a big chunck of a negative retained earnings sitting there as a result of the C-Corp's loss. How do I get rid of that? This is my first time converting a C to S,....but since I have accounting common sense and have experience, I cannot imagin the journal entry that I have to make to make that account a zero...Debit R/E to Zero and Credit ?????? loss?? | |
DeacDiggler (talk|edits) said: | 11 March 2008 |
| I'd maintain GAAP retained earnings on Schedule L, and start your M-2 at zero. AAA definitely has to start at zero. I wouldn't expect M-2 to tie to Sch L for an S corp....even where it has been an S corp forever you see some divergence. | |
| 2 April 2008 | |
| Any opinions on the following which is along the lines of this discussion. I'm dealing with a corp originally formed in 1958. It has been converted from C to S and then back to C at least a few times. It is currently has S status. I am concerned because coincidentally the AAA equals the R/E on the Schedule L. 1st question: In my opinion, the odds of that are remote (as KatieJ alluded to above). Isn't that true?
The son of the original shareholder purchased the Corp from his dad in 1970 for $72K. The prior CPA who has been involved with this client for the past dozen years or so, converted this corp to S status in 2005, then proceeded to use the losses of 2005 and 2006 to write off the $72K basis. 2nd question: Aren't the odds remote the owner's basis is still exactly $72K? Wouldn't the periods when it was an S cause the basis to change (as earnings and losses would increase and decrease the basis by odd amounts)? 3rd question: Since I can't go back for 36 years and audit this company's R/E, assuming I stick with the 12/31/06 AAA figure which is about $305K, I assume that it might be a good time to dividend out that balance or at least part of it, while the rate is 15%. Is that true? Anyway, this group's insightful comments would be appreciated. Thanks. | |
| 9 April 2008 | |
| I have the same issue and questions as Smeli does. My bones tell me don't mix the old C-corp RE with the new....
And don't mix it into AAA so... | |
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