Business Formation

A late election to be an S corporation generally is effective for the tax year following the tax year beginning on the date entered on line E of Form 2553. However, relief for a late election may be available if the corporation can show that the failure to file on time was due to reasonable cause.
To request relief for a late election when the tax year beginning on the date entered on line E ends on or after December 31, 2007, a corporation that meets the following requirements can explain the reasonable cause in the designated space on page 1 of Form 2553.
The corporation fails to qualify to elect to be an S corporation (see Who May Elect on page 1) solely because of the failure to timely file Form 2553.
The corporation has reasonable cause for its failure to timely file Form 2553.
The corporation has not filed a tax return for the tax year beginning on the date entered on line E of Form 2553.
The corporation files Form 2553 as an attachment to Form 1120S no later than 6 months after the due date of Form 1120S (excluding extensions) for the tax year beginning on the date entered on line E of Form 2553.
No taxpayer whose tax liability or tax return would be affected by the S corporation election (including all shareholders of the S corporation) has reported inconsistently with the S corporation election on any affected return for the tax year beginning on the date entered on line E of Form 2553.
Similar relief is available for an entity eligible to elect to be treated as a corporation (see the instructions for Form 8832) electing to be treated as a corporation as of the date entered on line E of Form 2553. For more details, see Rev. Proc. 2007-62, 2007-41 I.R.B. 786.
To request relief for a late election when the above requirements are not met, the corporation generally must request a private letter ruling and pay a user fee in accordance with Rev. Proc. 2008-1, 2008-1 I.R.B. 1 (or its successor). However, the ruling and user fee requirements may not apply if relief is available under the following revenue procedures.
If an entity eligible to elect to be treated as a corporation (a) failed to timely file Form 2553, and (b) has not elected to be treated as a corporation, see Rev. Proc. 2004-48, 2004-32 I.R.B. 172.
If a corporation failed to timely file Form 2553, see Rev. Proc. 2003-43, 2003-23 I.R.B. 998.
If Form 1120S was filed without an S corporation election and neither the corporation nor any shareholder was notified by the IRS of any problem with the S corporation status within 6 months after the return was timely filed, see Rev. Proc. 97-48, 1997-43 I.R.B. 19.

You may be treated as actively participating if for example you participate in making management decisions or arrange for others to provide services. Examples of management decisions are, approving new tenants, deciding on rental terms, approving capital or repair expenditures and other similar decisions.

An individual's share of partnership losses (reportable to a partner on a schedule K-1) may not exceed the adjusted basis of the partnership interest. The basis is generally the original capital paid, plus accumulated taxed earnings that have not been withdrawn, less withdrawals.
Partners are subject to the at-risk loss limitation and the passive activity loss limitation rules.
The at-risk limit affects the amount of the loss to the portion that that partner is personally liable for. Generally a passive loss is limited to either passive income or up tp $25,000 if there is active participation in a rental real estate activity.
There is no easy way to explain these rules. Please contact a local CPA to determine the deductibility of the loss reported on Schedule K-1. This area of the tax code is quite complex and confusing to many.

Guaranteed salary that is fixed without regard to partnership income is taxable as ordinary wages and not as partnership earnings. As a General partner the guaranteed salary and net partnership income is subject to self-employment tax. Limited partners do not pay self-employment taxes unless guaranteed payments are received.

A partnership that pays premiums for health insurance for its partners has a choice. It may treat the premium as a reduction in distributions to its partners or deduct the premium as an expense and charge each partner's share as a guaranteed salary payment taxable to the partner. The partner reports the guaranteed payment as non-passive income on Schedule E and 100% of the premium as an adjustment on Form 1040 line 29.

No. The K-1 disallowed losses due to the At Risk limitation rules are not lost and can be carried over and may be deductible in future years. The term "At risk" means the exposure to the danger of economic loss. A person can claim a tax deduction in a limited partnership up to the amount he or she is at risk if the taxpayer can show it is at risk of never realizing a profit and of losing its initial investment

Generally not. Interest income is defined as portfolio income, not passive income. Portfolio income includes interest, dividends, and gains on the sale of investment property. Passive K-1 losses can only be used to offset other passive income, except when the $25,000 special loss allowance for persons with active participation in rental real estate entities can be utilized.

DBA is an acronym for "Doing Business As". It is also known as a Fictitious Name. Most states require that sole proprietorships and partnerships that are conducting business under a name other than the owner(s) must file for a DBA certificate in the county where business is conducted. The DBA certificate is generally obtained at the Clerk of Court of the county in which business will be conducted. Fees are typically between $100 and $225 and most courthouses have records that may be searched to determine if your suggested name will be unique.

Simply stated, an S Corporation is taxed in the same manner as a partnership and is not taxed at the federal level. The income or losses and expenses flow through to the shareholders. A "C" Corporation pays tax on its profits and when the owner shareholders take profits from the corporation, the distributions take the form of taxable dividends. In effect, this is a double taxation of profits. There are advantages and disadvantages to both S Corporations and Regular C Corporations. Speak to your local CPA about the tax strategies of selecting the type of entity for your business.