Converting Your Business To an S-Corporation
Converting your business from a sole proprietorship to an S corporation is a simple three-step process.
1) Set up a corporation with your state. In Florida, corporations are set up through the Division of Corporations – Florida Department of State. They can be set up online at https://dos.myflorida.com/corporations.
2) Obtain a Federal Tax ID for your new corporation and file an S- Election with the IRS. You can obtain a Federal Tax ID by filing on the IRS’s website at https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online . After you have your tax ID complete the IRS Form 2553 and file it with the IRS.
3) Open a new bank account using your new corporation and its tax ID. Then transfer any business assets and inform your customers that all future payments should be made payable to your new corporation.
Remember that for the S-Corporation it, and not your old sole proprietorship, need to be who customers do business with. Invoices should come from your new corporation. Payment should be deposited into the corporation’s bank account. Business expenses should also be paid by the corporation through the corporate bank account.
Note: S-Corporations are passthrough entities and do not pay federal income tax. They need to file federal income tax returns and all profits and losses pass through to the shareholders, who are responsible for including the profit or loss on their personal returns. Officers of S-Corporation are also required to receive reasonable compensation in the form of payroll for the corporation. For more information on S-corporations and other business entity choices, see Business Entity Choices on our website, and be sure to consult your tax advisor with any questions.
Answering The Digital Assets Question On Your Tax Return
All taxpayers filing forms 1040, 1040-SR, or 1040-NR must answer a question about digital assets; it is a yes or no question.
Taxpayers need to click the “Yes” box if they:
- Received digital assets as payment for property or services provided;
- Transferred digital assets for free (without receiving any consideration) as a bona fide gift;
- Received digital assets resulting from a reward of award;
- Received new digital assets resulting from mining, staking, and similar activities;
- Received digital assets resulting from a hard fork (a branching of a cryptocurrency’s blockchain that splits a single cryptocurrency into two);
- Disposed of digital assets in exchange for property or services;
- Disposed of a digital asset in exchange or trade for another digital asset;
- Sold a digital asset; or
- Otherwise disposed of any other financial interest in a digital asset;
Taxpayers should check the “No” box if they:
- Owned digital assets but did NOT engage in any transactions during 2022;
- Transferred digital assets from one wallet or account to another account they either own or control, and if digital assets were purchased using real currency.
Those who click the “Yes” box must report all income related to their digital asset transactions on the relevant tax forms.
Excited About Your Tax Refund?
Maybe you shouldn’t be. A tax refund is a reimbursement to taxpayers who have overpaid their taxes — often due to having employers withhold too much from paychecks.
The U.S. Treasury estimates that nearly 3 quarters of taxpayers are over-withheld, resulting in tax refunds. When you get a tax refund the government is just giving you back the money you paid. Think of it as giving the government an interest-free loan.
If you don’t want to be part of crowd lending the government money interest-free, you can adjust your withholding by filing a new W4 with your employer. If you are one of the taxpayers making an estimated tax payment quarterly, you can adjust those payments so they better reflect for income and projected tax bill.
Couldn’t you use a little extra money in your pocket throughout the year?
There is nothing wrong with owing a small amount when tax time rolls around. But be sure that your payments are the lesser of 100% of your prior year’s taxes or 90% of the current year’s taxes to avoid any underpayment penalties.
Need help figuring out where you stand at any time during the year? Just call your tax advisor.
If you’re an RMS Accounting client there is no charge for any tax planning support you need throughout the year, so give us a call at 954-563-1269.
How Are S-Corporations Taxed
Unlike regular (non-S-Corporations) S-Corporations do NOT pay income tax. Instead they are considered pass-through entities.
This means that the business’s profits, losses, and other items of the S-Corporation are passed through to the owners/shareholders in the year earned by the S-Corporation, independent of when payments are made to the shareholders. While this eliminated the double taxation of a regular corporation it also means that shareholders can end up paying tax on income earned by the S-Corporation but not received by them.
Profits from S-Corporations are NOT subject to self-employment (Social Security) taxes like those of partnerships. Unlike partnerships, where owners can’t be included in payroll, S-Corporate officers must receive reasonable compensation as payroll.
S-Corporations must use a calendar year for tax reporting and need to file a tax return by March 15 of each year. They file on form 1120S and supply each shareholder with a K-1, showing their share of S-Corporate income and other items that must be reported on the shareholder’s personal tax return.
For more information see Finding the Right Legal Form for Your Business
Do I Need Paper Copies of My Tax Returns & Receipts?
You don’t need paper copies of your return. Electronic copies will work just fine. You do need your electronic files in a format that does not allow easy alteration. PDFs and TIFFs are preferred and can be used to keep not only for returns but also as receipts and supporting documents.
Electronic record keeping allows you to easily keep back files in the cloud, or to use a USB drive that you can easily take with you. Paper files take up lots of space, attract bugs and can easily be lost in a disaster. Electronic records can be safely stored in multiple locations and don’t require storage space.
Energy Efficient Home Improvement Credit Up to $1,200
Beginning January 1, 2023 the Inflation Reduction Act of 2022 amends the Nonbusiness Energy Property Credit from a lifetime credit of only $500 to an annual credit of up to $1,200 per year. The credit is equal to 30% of the cost for qualified energy-efficient improvements installed during the year.
Credit amounts are limited to:
• Any qualified energy property—$600
• Windows and skylights—$600
• Exterior doors—$250 and $500 in aggregate
• Heat pump and heat pump water heaters, biomass stoves, and boilers—$2,000
Identification numbers will be required, with respect to specified property items placed in service after 2024.
An additional credit amount of $150 is available for a home energy audit.
Planning to make improvements to your home this year?
Be sure to check the energy efficiency of those improvements and don’t overlook the credit when tax time rolls around.
What Is Required For A Corporation To Elect to Be An S-Corporation
To make the election to be treated under Sub Chapter S of the Internal Revenue Service Code a corporation must:
1) Be a U.S. Corporation (one set up under the laws of any state) of another entity that makes an election to be treated as a corporation under the tax code such as an LLC or partnership.
2) All of the shareholders/owners must be U.S. persons for tax purposes. They may not be corporations or non-resident aliens.
3) It must also have 100 or fewer shareholders at all times AND there must be only one class of stock.
Qualifying new corporations have 45 days from incorporation to make a sub-chapter S election. Existing businesses can make the election in the first 45 days of a new tax year.
For more information see Finding the Right Legal Form for Your Business
Paper Return or E-file?
As most tax professionals learned during the pandemic, paper filing is a great way to delay your refund and end up with your return lost in an IRS avalanche. The IRS is still trying to get all the paper returns from the last two years posted and looking for returns and payments that got lost in the mail and did not get processed. The best reason for e-filing your return is that you get a receipt that it has been received, and there are no humans involved in inputting or processing it so it gets filed as submitted without errors made by IRS employees who are overwhelmed by the workload.
How do I get an ITIN?
To obtain an ITIN you must complete IRS form W-7 and submit this form along with original documents that prove your identity and status, such 
as an original passport or a combination of other documents such as Driver’s license/State I.D., USCIS documentation, and certain other documents.
Applications can be made directly through the IRS by U.S. mail or private carrier, but original documents including passports must be sent along with the application to the IRS, be sure to allow at least 14 weeks or more for the return of documents.
You can avoid sending original documents to the IRS by using a Certifying Acceptance Agent (CAA). A Certifying Acceptance Agent can verify original documentation and certified copies of the documentation from the issuing agency for primary and secondary applicants and their dependents. For dependents, CAAs can only verify passports and birth certificates. The CAA will return the documentation immediately after reviewing its authenticity and then file your application with the IRS for you.
RMS Accounting is a Certifying Acceptance Agent and can assist you with completion, filing, and verification so that you won’t have to send your original documents to the IRS with your application.
For more information give us a call at 954-563-1269 or 800-382-1040.
What is an ITIN and who needs one?
An ITIN is an Individual Taxpayer Identification Number, for people that don’t qualify for a Social Security Number but still need to file U.S. tax returns or open U.S. bank and investment accounts.
Foreign nationals that have U.S. source income from things like U.S. rental property, U.S. investments or operations of a U.S. business need an ITIN so they can file their U.S. tax returns and pay their U.S. taxes.
Those with U.S. source income that do not meet the residency requirements of the U.S. tax code may need to file a 1040NR tax return for nonresident aliens.
Those meeting the U.S. tax codes residency requirements may be required to file a U.S. tax return reporting their worldwide income. The tax codes residency requirements are not the same as the legal residency requirements for immigration, so one can be a resident for the purpose of U.S. income taxes with our having the status of legal residency.
Note: When applying for legal residency status, failing to have filed and paid U.S. taxes could have a detrimental effect, so be sure to check with a qualified immigration attorney.
So, if you are not eligible for a U.S. Social Security Number and have U.S. Income, are a U.S. Tax Resident, or are a dependent of someone that is a U.S. Tax Resident and are not eligible for a Social Security Number an ITIN might just be the right solution so you can become tax compliant.