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FAQ

C-Corp change fiscal year ending before first tax filing but after SS-4?
If you incorporated in 2021. then you should have already filed returns for 2021 and 2021. also 2021 is due unless you filed an extension.  If you have not filed tax returns for 10, 11 and 12, you are still passed the due dates of the returns and so will have to file an 1128, after filing calendar year returns for the open years.  You don't qualify for the first year exception if your first tax return is already 2 years late. California requires that for CA state tax, corporations adopt the same tax year as they have for federal tax purposes, unless granted an exemption, so once the federal tax year is changed CA will be changed also.
Should I change my startup's tax year to a fiscal year end, eg June 30th instead of December 31st? What are the benefits and drawbacks to doing so?
NO, DON’T DO IT.NO. NO. NO.Do not change your startup’s fiscal year end. Keep it to Dec 31.Generally, we highly advise clients against changing their tax year (and fiscal year) unless there is a very strong business purpose in order to avoid pitfalls of missed tax and statutory deadlines. Some deadlines will shift with a company's fiscal year (such as the corporate income tax return), while other deadlines will remain on a calendar basis, depending on jurisdiction and type of tax (1099s, payroll taxes, sales taxes, property taxes, etc.). Overall, this complicates tax compliance heavily while providing very little benefit.Additionally, your startup tax CPA would need to file a short year-year return for the year in which the change would occur, which would mean two tax returns in one year.If you are looking into a change of fiscal year because of a presentation standpoint, you can always present your financials to the board in any given increment you like (6/1/17-5/31/18) or one that better illustrates the life cycle of the business as this would not complicate the tax return filing.….But if you (are a crazy person and) decide to change your fiscal year end, here's how to do it for Federal tax purposes:IRS approval is required to change your tax year end, but under certain circumstances, a C-corporation can change tax year end under automatic approval procedures.Among the basic requirements to qualify for an automatic change:the corporation must not have changed its tax year within the prior 48 months;the corporation must annualize its taxable income for a short tax year (This means that a startup with a 1/31 fiscal year end would file a 1-month short year-year return for 1/1/2018-1/31/2018, but annualize the income to ensure that the company is not getting any benefits from short-year tax attributes).various other requirements to ensure the year-end change is not a method of tax avoidance (about a dozen other rules, but most are not applicable to startups).A corporation, which does not qualify for an automatic change may still be able to obtain consent from the IRS for the change under the non-automatic procedures as long as it can establish a valid business purpose (note: reduction or avoidance of tax is not considered a valid business purpose). IRS has prescribed a series of tests for establishing a business purpose for a requested annual accounting period - testing when revenue is earned, or the natural business cycle of the company, or other "facts & circumstances".To request permission from the IRS for a change (including changes which are automatically approved), the company must file Form 1128 (Application for Change in Accounting Period) no later than the due date for the federal tax return for the short tax year, but no earlier than the last day of your short year (So a startup with a 1/31 fiscal year end must apply for the change between January 1, 2021 and May 15, 2021 after the short tax year ending 1/31/2018).If you receive IRS approval for your short tax year ending 1/31, your short-year-return 2021 (and all subsequent fiscal year returns) would be due May 15, but can be extended to November 15 each year. As mentioned above, many of your other tax filing deadlines would remain on a calendar basis (such as payroll tax, W-2s, 1099s, certain state taxes, property taxes, sales taxes, etc.).Since most startups ate the Seed - Series B stage is a loss company (and since tax rates have recently all been lowed to a flat 21% for C-corporations) I don't anticipate any tax complications from a change in year-end.
What is the best way to determine what salary to pay me working at an S corporation?
Dear Entrepreneur, First off I want to congratulate you on your first step as an entrepreneur. As you take on this journey of entrepreneurship you must make sure that you assemble the right team of advisors. I mention advisors because no one truly knows everything and if they say that they do then they are probably not the ones you want on your team. As an entrepreneur you have to know how to be humble enough to accept criticism and instruction but wise enough to know which information to follow. You are the business owner an ultimately it is your decision what you do but just make sure that it is legal and documented.  Never take an advisors guidance blindly because we all are works in progress. With that being said here are some suggestions: 1. Don't file the Subchapter S election: When you file as a corporation you are automatically a Class C corporation and you must file additional documentation to become a S corporation. Most accountants advise business owners to become a class S corporation for two main reasons: 1. To claim business losses against any personal income: In the beginning of every business their tends to be losses that are incurred. The S corporation is a flow through entity and as such income and losses are passed through to you on a personal level. There is a lot of inaccurate information on the internet about the differences between entities. "If you see it on the internet it must be true." More than likely not. Here is the info directly from the IRS website: S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Internal Revenue Service The next answer is two fold and will be answered as such:2.1 To prevent the business owner from being double taxed: This is in relation to the business owner filing as a Class C corporation which files a separate business return. (Form 1120) The Corporation then pays a wage or salary to the officer/owner that pays taxes on that income personally. In a class S corporation the business filing is no longer required because the income is distributed to the owner on a personal level. 2.2 To prevent the business owner from paying self-employment taxes as a sole proprietorship or an LLC. LLC's and sole proprietorships are both flow through entities but have to pay a self-employment tax on their income. When filing a Class S corporation the self-employment tax is eliminated.  Why I suggest you to exist as a Class C corporation?Class C corporations give the business owner greater flexibility in terms of tax planning, fringe benefits, fund raising, etc. Year EndA Class S corporation has to file on a calendar year end of December 31. (Their are very rare exceptions and it is not recommended by the IRS but must be approved by filing Form 1128 Application To Adopt,  Change, or Retain a Tax Year. This permission is sometimes granted for businesses that are seasonal in nature.) Class C corporations on the other hand at their initial EIN filing can choose what time of the year they would like to file their corporate taxes. (Personal taxes must still be paid regularly.) There are many benefits to having a fiscal year but one of the main benefits is that you can handle business and personal filings at different times which allows you greater tax planning flexibility. (For greater insight into year ends please contact an experienced local tax accountant or consultant in your area.) Fringe BenefitsAs an employee of your corporation you can set up certain fringe benefits that are tax free and do not have to be filed under your income personally. *Special note: not all fringe benefits are tax free and will be seen as taxable income unless the tax law specifically excludes it from taxation. The taxable fringe benefits should be included on the W2 of the employee and are subject to withholding.* Here are a list of the tax free fringe benefits: Health Saving Accounts, Accident insurance, Health insurance( up to a certain amount), achievement awards, commuting benefits, educational assistance, dependent care assistance, moving expense reimbursements, group term life insurance coverage (based on policy value),working condition fringe benefits such as services and property that may be provided so that the employee can do his or her job, business premise lodging, cafeteria plans that will allow the employees to choose from two or more benefits consisting of cash and qualified benefits, employee discounts on the goods or services that the business/employer sells, employee stock options, supplemental unemployment benefits, qualified employee benefit plans which include stock bonus plans, money purchase plans as well as profit-sharing plans. There are also some other cool fringe benefits:De minims fringe benefits: (low cost) Such as coffee, soft drinks, event tickets, low cost holiday or birthday gifts, traditional awards, and other special occasion gifts. For more information on fringe benefits please visit the IRS website and find IRS Publication 15-B, Employer’s Tax Guide to Fringe  Benefits. (Make sure your accountant has knowledge of fringe benefits and the difference between taxable and non-taxable benefits.)  2. Contact a Local Employment Agency: This section returns me back to the focus of proper documentation as a business owner. I will suggest that you contact a local employment agency in your area and supply them with a total amount of hours worked as well as your management responsibilities. Have the employment agency put into writing for you the cost that it would take to hire a person to fill your role in case of you could no longer fill the role. Take the document that they prepare and file it in the same place that you keep a copy of your tax returns in case you are ever audited. Other things to consider: Please make sure that you understand the differences between distributions and wages as a Class S Corporation. This is very important because if you do not fully understand these concepts you can be at a higher risk of having your distributions reclassified as wages which could in turn cause you to pay more in taxes and penalty. (Make sure that you and your accountant speak annually about the balance between your wages/distributions.) Although the subject can be more complex than what I am sharing here are some tips: 1.Make sure that you do not make more than one monthly distribution.2. Make sure that when the distribution is made it is documented in your corporate minutes each time a payment is made.3.Make sure that you state the distribution payment in terms of dollars per share. (Round to the nearest whole number) x Total shares.There are many other suggestions but those suggestions should be discussed between you and your account. After all, that is why they are accountants. The issue of reasonable compensation can be a tricky one and should be something that takes into account many different factors such as the size of the business, state of the business, volume of business handled by the employee, complexities of the business, similar company employee comparisons(companies in your area that provide similar services), salary policy, employee salary history, local living conditions, employee performance, and the employees overall contribution to the company. In most cases you just need to use common sense, be reasonable, and document everything. *Keep a record in your corporate minutes that goes over your logic when determining your salary which should include the facts and circumstances that brought you to your ultimate decision.* Last Thoughts: There is so much surrounding this subject that one can write on it for hours but this is a good start. In most cases use your better judgment and act as a reasonable agent of your corporation. If you feel as though you are out of line with your actions then you probably are so correct it. Don't let this or any other issue keep you from flourishing as a business owner. These guidelines are only given to help prevent abuse. I believe the government has a true desire for businesses to succeed and as such wish to help more than control. In conclusion, Trust your gut, seek advice from your tax team, and learn continuously. Good luck and make it happen. Warmest Regards, J.R. McNairMeticulous Entrepreneur   ps: If you have any other questions please feel free to reach out to me at info@jrmcnair.com or visit me online at http://www.JRMcNair.com