Tax Year & Incorporation Question
My partner & I just won $30,000 in a business plan competition. We haven't incorporated yet (and therefore haven't cashed the check). We plan on spending all the money to get the business running - but not right away. So we don't want to pay 2012 taxes on $30,000 when 12 months from now we'll probably be at break even. What are our choices? My online research seems to suggest that registering as an LLC, S-Corp, or C-Corp in our state (Michigan) will give us the ability to designate our tax year as different than the calendar year. But only 3 months out. So if we register on Dec. 1st, 2012 we could have our tax year end on March 31st, 2013. That would give us four months to spend the money but I'd rather have 12 months. Am I correct in the above statement and are there any other strategies I can use?
Incorporation Legal Tax Accounting
1 Answer
The IRS generally does not allow S-Corps to designate an alternate tax year (with the exception of section 444 election) so the LLC and C-Corp are your options. [UPDATE: A LLC can only set its own fiscal year if it is taxed like a corporation; single member and partnership pass-through taxation force the LLC to abide by the tax year of the individual member(s)]. Why not set the fiscal year to later in the year, like June or November? Note that you need to commit to that fiscal year once you declare it to the IRS. The notion that you are limited to 3 months out is specific only to S-Corps under IRC Section 444: See here
A partnership or an S corporation that makes a section 444 electionThe state you set up the business entity in does not influence the federal tax rules applicable in your question. Michigan state tax rules may be different, so it'd be wise to double check on that.
must make certain required payments and a PSC must make certain
distributions. Here's what IRC Section 444(1) says: In General. -
Except as provided in paragraphs (2) and (3), an election may be made
under subsection (a) only if the deferral period of the taxable year
elected is not longer than 3 months.
Disclaimer: I am not a tax lawyer and this is should not be taken as professional advice. This is simply my opinion based on personal experience and research.
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LLC cannot chose a tax year, it can only rely on the tax year of the partners, which in this case is likely to be calendar for both. No luck there. Only C-corpt. Doubt if worth the trouble. – Littleadv 12 years ago
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littleadv, I checked into your assertion that an LLC cannot choose a tax year. From what I found, you CAN choose a fiscal year for an LLC. But then you need to choose to be taxed as a corporation. – Thread7 12 years ago
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That's correct, a LLC can choose its fiscal year only if it opts to be taxed as a corp: http://www.nolo.com/legal-encyclopedia/choosing-your-llcs-fiscal-year.html – Henry The Hengineer 12 years ago
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Good link Henry. It seems like in my case, forming an LLC, electing to be taxed as a C-Corp, and choosing a fiscal year ending in November might be a good choice. However, that begs the question - why not just form a C-Corp to begin with? – Thread7 12 years ago
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for that I would suggest looking at the LLC vs C-Corp topics on this site and throughout the web. I would say the decision outside of tax issues has to do with contracts and ownership logistics and rules. Michigan state laws and taxes may also vary for the two types. – Henry The Hengineer 12 years ago
