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Initial
Filings
Every new corporation must apply for a Federal Employer
Identification Number ("FEIN"). The application, IRS Form SS4, must be filed
with the local IRS Service Center. The FEIN is used in most federal and state tax filings
and is usually required to establish an account with any financial institution. Form SS4
also contains several questions about the new business's activities, such as anticipated
date of having employees.Although Form SS4 requests
information about the corporation's year end, IRS regulations say that the choice of year
end is made on the first tax return filed for the new corporation. To avoid
inconsistencies, note "to be determined" in the blank for year end. An officer
of the corporation can apply for the FEIN over the phone.
The Tax Year
Most regular corporations can elect any fiscal year
they want. The tax year is selected on the entity's first income tax return. In general, S
corporations and professional service corporations must use a calendar year. If either
type of corporation can show a valid business purpose for using a different fiscal year,
the IRS may allow the use of a different fiscal year. As a requirement of adopting a
fiscal year, the corporation must make certain distributions before the end of the
calendar year. Generally, once the accounting period is selected, it can only be changed
with IRS permission.
Among the factors a C corporation should consider in choosing
a year end are the: (1) natural business year of the corporation; and (2) possible
advantage of initial year income deferrals. Be sure the tax year selected in the corporate
documents is the tax year reflected on the tax returns.
Accounting Method
The Internal Revenue Code provides that the corporation
chooses its tax method with the first tax return it files. Generally, the business must
report its income using the method regularly used in keeping its books. For most
businesses, the choice is between the cash or accrual method.
The Code is extremely complicated in the methods and
approaches for selecting the corporation's accounting methods. The use of the cash method
by a regular corporation is restricted if its gross income exceeds $5 million or if the
corporation has an inventory of goods in production or held for resale. Generally, once
the tax accounting method is selected, it can only be changed with IRS permission.
The Code contains many limitations and restrictions on available accounting methods and
the manner in which deductions can be taken. Consult with your accountant and rely upon
him or her in making these decisions.
Inventory Method
Each corporation with inventory must select an approved
inventory method. Usually, these methods are elected on the corporation's first income tax
return. These rules are quite complex and some corporations are required to use certain
types of inventory methods. Again, you should rely upon your accountant to make these
decisions.
The "S" Election
By the fifteenth day of the third month of a
corporation's tax year, a corporation must choose whether it wants to be treated as an S
corporation. The requirements of an S corporation and its disadvantages are discussed in
greater detail below.
If you decide to operate as an S corporation, you will need
to (1) file the election; (2) choose the appropriate date; and (3) make the election
promptly.
The Code requires that the election be filed by the fifteenth day of the third month
after the beginning of the corporation's tax year. If the election is made, make sure that
it is mailed to the correct IRS Service Center by U.S. certified mail, return receipt
requested. Check on the return receipt within 15 days and check on a response to the
filing within 45 days. The burden of proving the filing is on the taxpayer as is the
burden for strict compliance with the filing requirements.
Amortizing Syndication & Startup Costs
The Code allows a new corporation to elect to amortize certain
organizational expenses over a period of not less than 60 months. If the election is not
made, the corporation must capitalize the expenses and deduct them upon dissolution. |
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