Just started an LLC, can I change tax election? (Disregard to S)

Tax, SDIRAs & Cost Segregation
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Just started an LLC, can I change tax election? (Disregard to S)

Michael Gayer Jr
Inspector · Mililani, HI · Member since 2016 · 170 posts · 31 votes

Aloha Investors,

I have a Tax Question ...

I just started an LLC on November 16. Can I change tax election? Change from Disregarded to S-Corp. I haven't done any transactions yet.

Thank you in advance,
Mike

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Patti RobertsonBusiness Member
Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
9y

I'm not a CPA, but my CPA has filed several elections for me, including the one you mentioned above. My situation is unique because of the diversity of businesses I'm in. The benefit for me was cashflow. The S-Corp election allowed us to pay our taxes through payroll, eliminating the requirement to pay estimated taxes when the income was earned. As long as the taxes get filed by the end of the year, I avoid the penalty of not paying on time that I would have if I filed as an LLC. For most people this would be a terrible idea, because most people don't have the discipline to hold the tax money. For us, at the time, we had a seasonal business that collected all the annual income in a 3 month time frame, so it was beneficial. It gave us the use of the tax money throughout the year - basically an interest free loan to ourselves.

As with all tax questions - consult with a qualified CPA or enrolled agent.

757-472-2547
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  • Patti RobertsonBusiness Member
    Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    I'm not a CPA, but my CPA has filed several elections for me, including the one you mentioned above. My situation is unique because of the diversity of businesses I'm in. The benefit for me was cashflow. The S-Corp election allowed us to pay our taxes through payroll, eliminating the requirement to pay estimated taxes when the income was earned. As long as the taxes get filed by the end of the year, I avoid the penalty of not paying on time that I would have if I filed as an LLC. For most people this would be a terrible idea, because most people don't have the discipline to hold the tax money. For us, at the time, we had a seasonal business that collected all the annual income in a 3 month time frame, so it was beneficial. It gave us the use of the tax money throughout the year - basically an interest free loan to ourselves.

    As with all tax questions - consult with a qualified CPA or enrolled agent.

    757-472-2547
    1Reply
  • Account Closed
    Professional · Bothell, WA · Member since 2016 · 89 posts · 17 votes
    9y

    @Michael Gayer Jr, I see your question as mixing two concepts. An LLC can be pass through (meaning the members are the responsible taxpayers, assuming they are all qualified taxpayers) or the LLC is responsible for its own taxes. A corporation can be pass through (an "S", meaning that the shareholders are the responsible taxpayer) or pay its own taxes (a "C", the Corp is the responsible taxpayer).

    Here in WA one is not allowed to change an LLC to a corporation. You may close the LLC and start a corporation. The type of legal entity is a State issue. Whether that legal entity pays its won taxes or passes the income through to the owners, making them the responsible taxpayers, is a federal IRS issue.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Michael Gayer Jr:

    Aloha Investors,

    I have a Tax Question ...

    I just started an LLC on November 16. Can I change tax election? Change from Disregarded to S-Corp. I haven't done any transactions yet.

    Thank you in advance,
    Mike

     You can; however, the big question is SHOULD you? What type of investing are you doing?  If you are holding rentals it is a BAD IDEA.

    [email protected]224-381-2660
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  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    From IRS "The election must be made no more than two months and 15 days after the beginning of the tax year when the election is to go into effect."

    So, yes you can still make the change.  But you should consult with a CPA first to make sure its the best thing for your business.  Also, once you elect to make the change, I believe you're locked into that classification for 5 years.

    The reason some CPA's advise their clients to do this is to offset some of the self-employment taxes.  But this is a unique situation that would be different for every individual case based on where your business income comes from and how much income.  I would think starting off that it wouldn't be beneficial unless you have a very large amount of business income and limited deductions.

    Consult a good CPA.

    1Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    An LLC is formed under state law, some states will allow you to convert your LLC to an S-Corporation, some will not. For most people, this doesn't matter, they just want to file taxes a certain way. I am assuming you have an LLC under state law and you are currently classified as a disregarded entity because you are the only shareholder. You can elect to file taxes as an S-Corporation, you legal structure will still be an LLC. Talk to your tax advisor about forms 8832/2553 and the timing of the elections.

    Depending on what you are using the LLC for this may be a bad idea. Generally you do not want to place real estate into an LLC however there are situations it would be advisable.

    1Reply
  • Daniel HymanBusiness Member
    CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
    9y
    Michael Gayer Jr Form 2553 is what to file in order to elect S-corp status. Just be aware that
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  • Daniel HymanBusiness Member
    CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
    9y
    ...as I was saying...just be aware that electing to be taxed as an S-corp will put you in a position of other admin needs such as a business tax return (1120S) and payroll processing. As mentioned by the other fine folks, make sure to consult a CPA to see if it's the right fit for you.
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