Discussion:Proper setting up of books for S Corp

1) Does he setup an equity account for stock purchase, or in an S-Corp is there another term. What other special GL accounts does he need under an S-Corp.

2) Is there a minimum amount that an owner has to capitialize the business with under an S-Corp. In other words can he start with $100 worth of stock and then create a loan to the corporation for say $10,000. Is there a magical formula where the IRS wants more into stock and less into loan.

3) This company was a sole proprietor and is creating a S-Corp and basically starting the company over, he is not converting it. He has debt left over from the sole proprietor that he wants to have the new business pay. Beats me how to do this except create a negative beginning balance in equity???? Not even sure this legal, or he should even be doing this.

4) One last question, more basic, he paid a bunch of bills on the last day of the year and wants to deduct this in last years income. It appears this should be A/P as he obviously did this to avoid taxes. Normally under a cash basis the check is recorded when written, but assume different at the end of the year?

I am familar with QuickBooks, as I teach some classes, however, I am not a fulltime accountant so not super familar with taxes.

Thanks for any assistance.

1. Stock, distributions, additional paid-in-capital

2. No minimum. No magical formula. Capital vs loans depends on whether/when owner wants to take money out.

3. Hmm. Starting over except that the corp pays prior debt? What is that debt related to? Is there an asset that should be contributed to the corp?

4. If he was on the cash basis for last year and the disbursements are deductible, then he would be allowed to deduct them for 2008. There's no difference just because it's the last day of the year . . . unless the checks were held onto and actually distributed the following year.

He is on a cash basis, but he cut like $22,000 worth of checks on the last day of the year and mailed them that day, so obiviously did not cleared until January. The problem is that at the end of the year this throws him into a $22,000 loss for the year, but then he added income on the Jan 3rd to cover this. Seems suspious and didn't want to send any alarms. He only put in $100 so has no real basis so it won't affect his taxes, just seems a little questionable.

Checks don't need to clear in December to be deductible in that year. In addition, I think I would recommend keeping the $22,000 out of the corporation. If the company does pay it off, I agree with Letto.

I don't see any "starting over" here. Your client is incorporating his sole proprietorship. The assets and liabilities of the business need to be transferred to the corporation in exchange for stock. This is a non-taxable transaction under IRC Sec. 351, so no gain or loss is recognized on the transfer, and the corporation's basis in the assets and liabilities transferred is the same as the proprietorship's basis. The obligations of the proprietorship become obligations of the corporation and it is perfectly appropriate for the corporation to pay them. If the $22,000 of bills paid in December would have resulted in deductible expenses for the Schedule C, they're deductible expenses for the corporation. To the extent that they were personal and not business expenses at the individual level, they are not assumed or taken over by the corporation and their payment by the corporation would constitute a distribution to the stockholder.

Like Letto and Natalie, I'm suspicious of the "added income."

It would help to know what kind of business this is.

One way to analyze the Year 1 expense and Year 2 income is to imagine that the corporation did not exist and you were reporting the whole thing on a Schedule C. Would you allow deduction of the $22,000 of expense in Year 1 and postponement of recognition of the income to Year 2 if it were all on Schedule Cs?