- quote -

Let's see:

First question: Your last sentence seems to eliminate most
of the usual problems associated with C corporation taxable
income. If there is no net income then the only
complication is if there are distributions to you from the
"old" corp that exceed your basis in the stock of that
corporation. The complications with a C corporation arise
with the accumulation of profits (called earnings and
profits) in the corporation. When those profits are
distributed they are generally dividends to the
shareholder(s) and not deductible by the corporation
creating double taxation. Not as much of a problem if the
distributions are dividends qualifying as long-term capital
gains tax rates.

Second question: Quite possibly yes. There are certain S
corporation taxes at the corporate level that occur when a
corporation has previously been a C corporation. It sounds
like the only tax problem if you move your clients to the
new corporation may come from a built-in gains issue with
the S corp. (There are two other corporate level taxes that
can occur but it doesn't look like either will occur from
your statement of facts.) If the income generated in the
last few months of 2003 create significant value (goodwill)
in your new corporation or other assets in the new
corporation appreciate, then that increase in value becomes
built-in gain. That gain, unlike most S corp income, is
taxed at the corporate level if the underlying asset is sold
within 10 years after beginning of the tax year in which the
election to be treated as an S corporation is in effect.
And it will be taxed at the highest regular C corporate tax
rate then in effect. So, if you continue to operate under
the old corporation until the end of 2003 this issue
disappears. You will still have a filing requirement for
the new corporation in 2003 however.

Scott W Stevenson, CPA in CA
stevensonscott[at]yahoo.com

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I have been in business for about a year. I just incorporated a
C corp and elected to be an S but that won't go into effect until
next tax year. I did so because my current company is branching out
into a new area. I want to move the work I had been doing to under
the new corp. What are the complications for having income as a
C-corp before electing S-corp status? Would it make my life easier
to continue to do work under the old corp until 2004 and then start
billing under the new corp? This would mean that the new corp
would have no income as a C-corp. (The reason for splitting out
the work I have been doing away from my old corporation is that
I brought on some partners in the old corp and in case things go
sour, I want to make sure my current work and clients are unaffected)
I remember reading about some issues with how that old income is
treated. All income is taken out of the company, either as salary
or distributions and the new corp will have no losses.

thanks for any help!

andrew

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