I know, I know – IRS and funny don’t go together. They don’t belong in the same room, and they may not even belong on the same continent.
Yet at the end of the day the folks who work at the IRS are our family, friends, neighbors, etc., so it stands to reason that there’s a human side in there somewhere. And where there’s humanity, there’s laughter … somewhere.
I know this is true because I just finished reading a list of excuses for the late-filing of a particular IRS form that have been submitted to the IRS. First, the fact that the IRS keeps a list is funny. Second, that all of these excuses have worked!
I think my favorite business structure right now for businesses that earn active income is an LLC electing S Corporation taxation. Why? Well, for starters, I think S Corporation taxation is the most beneficial for beginning business owners who don’t have a lot of other income and have heavy losses in the early days. Where the income or losses are derived from an active business they can be offset against your other earned income, as opposed to passive real estate losses, where you are limited to $25,000 (unless you qualify as a Real Estate Professional, but that’s a story for another day).
The other thing I really like about the LLC-S combination is that it provides extra legal protection you don’t get in a straight S Corporation. I told you last week about how charging orders work, and how a personal creditor can’t attack your LLC interests or the assets within your LLC. But in a corporation you’re vulnerable, as creditors can attack your shares and through them, the assets of your business.
To turn your LLC into an LLC-s, you need to make two separate IRS filings; a Form 8832 and then a 2553. The wrinkle is that you’ve got 75 days, and the forms need to be filed separately, and the Form 8832 approved before you can file your Form 2553. And, as many of you know, new business owners tend to get really busy operating their businesses, meaning the 75 day deadline often goes astray. Typically the Form 8832 will get filed, but the Form 2553 won’t.
If that happens to you, don’t worry. The IRS has a huge list of excuses that it will accept for a late election. Here are some of my favorites:
- I meant to do it, but I forgot
- My [lawyer/CPA/bookkeeper/whoever] didn’t get it filed in time (we in the business call this the “blame your blank” excuse)
- It was filed … in a filing cabinet in my office
- I dreamed that I filed it and so I thought it had been done
Most of the time you just need to ask nicely and the IRS will backdate your status. One of our DKAffiliated members told me she was able to successfully elect S Corporation status 4 years after the business had been formed!