Accounting News and Notes

Atlanta CPA on Substantive Monetary Advantages of Converting Your Georgia C Corporation to a Georgia S Corporation

Recently I converted one of our  C Corporations to an S Corporation. Filing a Form 2553, which is the IRS election that a company makes to be treated as an S Corporation, does this. The company was a profitable one and had income in the hundreds of thousands.  By doing so, the company was able to avoid the double taxation that a C Corporation pays and only pay taxes once at the corporate level. In doing so we were able to save the taxpayer tens of thousands of dollars. S Corporations came into vogue in the 1950’s when Congress passed legislation allowing business owners to pay their taxes on their business profits on their personal return. Although a corporate income tax return is still required to be file for an S Corporation the earnings from the business and their corresponding taxes are paid on the respective shareholders personal return. S Corporations earnings, as well as their shareholder distributions, have to be reported/paid based upon the S Corporations stock ownership.

To illustrate how this might work, let’s assume an effective tax rate of thirty percent for both business owners and individuals. For the most recent client we converted to an S Corporation it was netting before taxes approximately $300,000. Thus, if it had stayed an S Corporation it would have paid approximately $100.000 in corporate income taxes ($300,000 times 33%) as well as then the owner of the business would have paid another $60,000 in taxes (the remaining $2000,000 of cash available after the above corporate income taxes were paid) time their attendant 30% personal income tax rate.

In the most recent actual client scenario we saved the client approximately $60,000. Our fees for doing the conversion were approximately $1000, resulting in a 60 to 1 monetary return for the client. Talk about a great return for your investment! In this particular situation the client, before they met me, were making estimated tax payments based upon their being a C Corporation and that the Internal Revenue Service requires taxpayers to make their estimated tax payments as they go. To help in the cash flowing of this particular situation we advised the client to set up a line of credit so that the cash need of their business would not be unduly negatively affected during the time requirements necessitated making the tax conversion.

As with all tax planning and in dealing with the taxing authorities things do not necessarily proceed as planned. In this particular situation the state of Georgia quickly refunded the estimated tax payments that had been paid. However in dealing with the IRS, they decided that the previously paid estimated tax payments would not be refunded until the S Corporation return was filed. Thus, the advantage referred to above, in having a line of credit available to the business to assist in any normal fluctations in cash flow needs and requirements. 

Though in the above example the tax savings were very high based upon the profit, the savings to a much smaller business are equally important and advantageous as small business owners desire to save tax dollars as well. Whether your business had hundreds of clients, just a handful for only yourself. converting to S Corporation status, if you qualify is a prudent and sound financial decision. To be an S Corporation you have to meet four criteria. They include having less that one hundred owners/shareholders, all of your owners have to be citizens of the United States, you are required to have a calendar year end and to have only one class of stock.

In the particular tax/client situation referred to above, it took a bit more time than anticipated and to get the IRS Tax Problem Resolution involved, the tax savings have been tremendous. Even if your net income is in the tens of thousands rather than the hundreds of thousands, as in the above example, converting to an S Corporation may well be the most profitable transaction you ever contemplate or consummate given the tax saving as well as effort involved.

John Dillard is a Christian Speaker/Author and Certified Public Accountant (All Rights Reserved). To See how he takes Christ along with him to work visit http://www.hiscpa.com/ (An Atlanta  CPA firm) and for his latest book Overcoming Life’s 9/11’s: Job’s Journey and to learn about his ministry visit http://www.john-dillard.com/ To contact John Dillard CPA (Atlanta Christian Author/Speaker) today call 770. 814.9304 proudly serving Duluth, GA, Gwinnett County and Beyond.

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