Main Street Business

#559 Retroactive S-Election for 2024: Why & How

• Mark J Kohler and Mat Sorensen

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In this episode of the Main Street Business Podcast, Mark J. Kohler and Mat Sorensen share powerful insights on why converting your LLC to an S corporation is a game-changer for tax savings. They discuss the crucial tax advantages, the importance of structuring income properly, and walk you through the filing process. Find out how you could potentially save $7,000 or more with this strategic business move.

Here are some of the highlights:

  • Mark emphasizes how LLCs do not save taxes and explains the process of turning an LLC into an S corp.
  • Discussion on the difference in tax rates between LLCs and S corps, with S corps allowing for lower self-employment tax.
  • Mat and Mark cover the importance of allocating income to FICA wages and the potential savings.
  • Mark outlines the three-step process for making a late S corporation election, including filling out form 2553 and referencing revenue procedure 2013-30.
  • Mark explains the workaround for the first year, including claiming compensation on both the 1120s and Schedule C.
  • The benefits of the S corporation strategy for business owners and the potential annual savings.
  • Need for proper health insurance premium write-offs and the overall benefits of the S corporation strategy.
  • Why S Corps should avoid taking the Qualified Business Income (QBI) deduction when filing taxes.
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever. Here is Mark and.

Speaker 2:

Matt, we're taking the tax law and trying to put it in your favor. We're trying to apply this to you and the IRS is giving you this rev proct option. But a lot of people are like, well, it's messy, how do I execute and pull this out? This is how you do it. That's what we're trying to do Advocating for small business owners, trying to save on taxes, finding the right way to do it. Do you feel good about it?

Speaker 3:

LLCs do not save taxes. You can go back in time and turn your LLC into an S-corp as of 1-1-24. You have got to reevaluate your risk tolerance and get educated. You're wrong. In 25 years I have never had a client audited for taking too low of comp.

Speaker 2:

So I see what you're doing there, man. I learned something Well, thank you. Welcome everyone to the Main Street Business Podcast. This is Matt Sorensen, joined by Mark J Kohler. We are delighted to be with you today because we want to talk about saving you money, yeah, and the S-Corporation election is a big question a lot of people have.

Speaker 3:

There's a lot of misinformation out there. I was just talking literally to a tax lawyer today that said, well, I missed the 75-day rule, so I can't be an S-Corp for last year. I'm like, oh my gosh. And so this is an important topic. We're going to break it down. Many of you should still try to be an S corporation for 2024. January of 2025 is not too late. We're going to talk about it.

Speaker 2:

Yeah, so what we're talking about here is making a late S election, which is allowed, which is allowed if you know the secret code which we're going to give you today.

Speaker 2:

Mark's been pioneering this for a while and, of course, many of you know Mark has given a ton of great tax strategies, information and breaking through a lot of the chaos and misinformation out there, and so but let me make sure you understand what we're talking about here. With an S corporation, let's say you were an LLC last year and right now we're in 2025. Let's say you're an LLC in 2024. And you're like man, I wish I did an S election. I didn't do that. I've heard about this S corporation strategy and how I can save on self-employment tax, but I didn't do it.

Speaker 3:

So I'm SOL, I'm out of luck and we're not talking statute of limitations. And to put some finer print on it, let's say you made $100,000 net last year. So you're a realtor, owned a restaurant, you're a landscaper, a contractor, a dentist, a chiropractor, whatever. You brought in $150,000, you had $50,000 in write-offs and you made about $100,000. You were taking home maybe $8,000 to $9,000 a month after tax, all your write-offs, and you're like I had a great year in 2024. You were looking down the barrel at a 15.3% self-employment tax, so that's 15% on a hundred grand. You're looking at approximately $15,000 in tax Before you pay income tax. That's your self-employment tax. Then you're going to have fed and state in the mix for at least another 20%, 15 plus 5. So now you're at 20 plus 15%. You're at a 35% tax rate and you wonder why people want to jump out of a window and go. I hate tax law. So that is because you are an LLC. Llcs do not save taxes. So what is the option? And it's really straightforward. This is very simple, straightforward podcast today. The option and it's really straightforward.

Speaker 3:

This is very simple, straightforward podcast today you can go back in time and turn your LLC into an S-corp as of 1-1-24. And we're going to talk about how. But the why is because now I can take that 100 grand of net income and at least split it in half. Let's just say I'm going to take 50 grand as a W-2 or subject to FICA and 50 grand as pass-through K-1. Now I just split that $15,000 bill in half, I just saved $7,000. I don't care if you're in California, I don't care where you're at. $7,000 makes sense. You're going to have to do an S-corp tax return and do some payroll or talk to your accountant. Yeah, you might be off $1,500 or $2,000. But, matt, here's a hard question. Spend two, save seven. Now hold on Before you answer. I know this is a really hard question. Should I spend $2,000 in good tax planning and advice to save $7,000? I don't know, I don't. Does it make sense?

Speaker 2:

Yeah, I think the math pencil is out there and you're up $5,000. And, by the way, this is every year. So it's not just about getting this tax strategy right for the prior year and kind of doing this fix-it strategy which we're focusing on today. It's about the S-corporation strategy every year and saving that type of money, and so we love this strategy. That's why we love talking about S corporations. This is for you operating business owners and all the examples Mark gave, from the dentist to the realtor Okay, everyone in between. This is what we're talking about. This is not for your rental properties. You do LLCs for your rental properties, for asset protection. We're not talking about this S corporation election. It doesn't matter there because you don't pay self-employment tax on that passive investment rental income.

Speaker 3:

Okay, now here's the crux of the issue For you tax accountants, advisors, tax professionals listening that may have saw this and said all right, let's see what market matters, saying what's the real crux of the issue? You know this it's reasonable comp. How much of that hundred grand can you actually allocate to FICA wages through a W-2 or a 1099, if you have to in year one, which we'll talk about that kind of work around the first year you're dealing with this but how much can I allocate to FICA and not get in problems with the IRS? What is reasonable comp? Well, people, let me just say this right out of the gate. So much, and I'll say it quickly In 25 years I have never had a client audited for taking too low of comp.

Speaker 3:

I have taught CE class after CE class, countless classes on what is reasonable comp. I've got articles on it, videos on it. It's in my book and I'm a licensed CPA in multiple states, licensed, a member of the AICPA and on the board of the Arizona AICPA. I am not going to recommend something that's too aggressive. If you think a 50-50 allocation of net income is too aggressive, you have got to reevaluate your risk tolerance and get educated. You're wrong. We have as an aside, the Main Street Tax Pro certification that is now two years underway. We've now educated 1,000 or more accountants, enrolled agents, cpas and tax lawyers around the country with the certification. Get to my website, markjkohlercom, where I teach and stand behind this entire reasonable comp calculation.

Speaker 3:

Now it's beyond the scope of today, but let me just say everybody, you're in good hands. This is not high risk and you accountants out there, do your research and come check out our Main Street Tax Pro certification and do a demo or a discovery call to see what it's all about. It will rock your world, change your life and we will send you clients and I don't take a piece of that, it's all your money and we'll teach you how to be a real tax advisor. Okay Now. So let's just assume again, we're back to a hundred grand. We're going to split it. We're going to save self-employment tax, the retroactive S election.

Speaker 2:

Is it that hard, Matt? I mean it's really expensive. How much do we charge at our firm? I think it's a couple hundred bucks. I actually don't even know the price of it, that's highway robbery.

Speaker 3:

I think it's $300 to do a retroactive.

Speaker 2:

S election. Okay, yeah, and you're going to save again thousands. Now, if you're like Matt and Mark, I made $20,000 last year, net after all my expenses. We're not worried about this yet. Okay, we're not doing this tax strategy. There's not enough savings there. But if you were in that example where mark talked about 100k we're talking about seven thousand dollars in savings it might cost you a couple thousand maybe. What I would say is your 40 or 50k net. We're looking at this and maybe looking to go back. So now there is something called a rev proc. Okay, there is actually a process, and the iris said you know what, if you want to go back in time to do this, we actually let you do this if you follow these steps Yep, here's the steps Three parts.

Speaker 3:

You're going to fill out the 2553, elect S-Corp status on that form on the front page to be 1124. You're going to sign the second page Now, again, you can pay our law firm to do this. Still, keep your account and talk to your account. I don't care, we charge like 300 bucks to do this for you, but you're going to fill out 2553. You're going to attack a reference rev proc 2013-30, which is the revenue proclamation from the IRS that allows for this, and then you're going to put a cover letter on it and you're going to say hey, under rev proc 2013-30, someone screwed up and didn't make this election back in 2024. So we're going to do it now.

Speaker 3:

You send that into the IRS. You can send it along with the tax return filing. I recommend you separate. Send it separately immediately. Get it done with. You can still file an extension for the 1120 S come March 15th and get to work on your 1120 S tax return, because now you're not filing as a schedule C or a 10 on your 1040. You're now going to file a different tax return. We'll come to that in a moment. But the first step is make this late election. Three steps, okay.

Speaker 2:

What about payroll, though? What do I got to do with payroll now? Because, as a sole prop and I was going on Schedule C I was just dropping that net income. I had 100K, but I was sending the IRS $15,300. Had $100K, but I was sending the IRS $15,300.

Speaker 3:

What am I doing differently now that I haven't done before? So this is where the claiming the FICA income is critical. So step one I make the election Now. Think about it. You're now an S-corp for 2024. What does the IRS expect? What they expect is a W-2, that you're now an employee of that S-Corp and you're going to claim 15 grand in payroll in our example.

Speaker 3:

Well, the deadline for the W-2s and the 941 was January 31st, right now in 2025. So you have two options. One option is go file your 941 in time if you hear this podcast in time, or file a late payroll processing procedure, which will include some penalties. Not that bad, but some accounts are so anal they want to make sure they file that 941 and issue the W-2 and the late W-2 and the W-3 and blah, blah, blah, and they're going to do all of that even if it's late, because that's the way they should have done it. Okay, that's option one. I would not recommend it.

Speaker 3:

Now that we're nearing the end of January, I would recommend a workaround. Option two never had a problem with IRS agents over the last 25 years. What you're going to do is pick up that income on the 1120S, line seven as compensation to officers or shareholders in the amount of $50,000. And then on your schedule C of your business owner, you're going to pick up that 50 grand of income with no expenses. So you're going to pay your self-employment tax on that $50,000 on a schedule C. So if the IRS comes and audit you, you're like I paid it. Whether it was a W-2 or on my schedule C, I paid it. What's the problem? And the IRS goes don't, and you're done, it's over. You paid your fair share. Now, was it the right way to do it? Was it a little clunky? Absolutely. With our new clients that come on board, you're never going to do that again. It's a first year workaround.

Speaker 2:

Yeah, and if you think of like, the spirit of the rev proc here is letting you come back in time to be able to do this and claim that S selection status, it's just all right. This is kind of an exception to the normal way you would do an S selection and so now the reporting on it gets a little clunky. So how do I do that? To still give the IRS the same amount of money that I otherwise would have done, meet the requirements of what I would owe, which is what you're doing here. You're just doing it in a normal way Now. You're not doing this next year. That's what we're doing in the fix it method with the rev proc and, as Mark walked you through it, what am I going to start doing in 2025 or this year forward? As I fixed it Now I'm going to doing quarterly payroll. I'm going to do a W-2 at the year end, but this first year is a little clunky because you're going back in time using this rep rock.

Speaker 3:

Okay, Now a couple other pieces and parts, especially for you accountants listening, Okay, Big picture, doing the election. Going back in time, Now I'm an S corp for 2024. You're going to start to file your 1120 S tax return for last year following the normal deadlines March 15th or September 15th, with extensions On line seven. On the front, you're going to claim the payroll amount you want to claim for your shareholder you and then you're going to pick it up on Schedule C and pay yourself employment tax. Now a couple other important notes. When you have Schedule C income, you pay yourself employment tax. You also get what's called the QBI deduction, Qualified Business Income Credit or deduction. You want to not take that. You want to waive that, because now you're double dipping on the QBI. You want to pay your fair share and not take the QBI. So you're going to take your self-employment tax if it was payroll and then say, okay, I won't take the QBI. When you're taking the QBI on that Schedule C income, it's kind of like tongue in cheek.

Speaker 2:

You're kind of getting an extra little stab at the IRS at the end.

Speaker 3:

Don't do it. Pay your self-employment tax, lick your wounds. You did it, it's cool. Pick up the Schedule C. Do your 1040. Do your 1120. People, you just saved $7,500.

Speaker 2:

That's a great point. I didn't even think about that. Okay, because I could see someone doing that. Now I'm still getting the QBI on the K1 coming out, but the QBI you don't get on the wage or salary, right, but you get on the profit coming out. So I see what you're doing there, man, I learned something.

Speaker 3:

Well, thank you. So now, one other thing to keep in mind here is there's other little strategies that you now want to come to aware, you're now aware of With that 1120S and this little workaround. You want to make sure you're writing off your health insurance premiums properly. You're going to claim it now on the Schedule C or Schedule 1 or 2 on the 1040. You're not going to put it on the 1120S because you probably didn't pay for it out of the company. But these are little things that are going to be very fact-driven, based on your situation. But now you're playing at a whole other level and, as Matt said, moving forward, you're going to use the payroll procedure and the more money you make, the more you save. So now you're at the big boy boys table. Every dentist, doctor, lawyer, accountant, engineer, restaurant owner, cpa, blah, blah, blah we're all escorts. Are you an escort? Absolutely.

Speaker 2:

This is good, okay. So 20 years, almost now, as an escort it's not high risk.

Speaker 3:

You're now just playing at a higher level.

Speaker 2:

Yeah, I love that. And you know, if you're like a business owner listening to this, you're like, oh crap, man, that sounds pretty smart. I've never thought through that at a high level like this. Well, mark Kohler is MainStreetTaxPros are. This is coming out of what you're doing in your trainings in the MainStreetTaxPro network, and so you can go to MarkJKohlercom and find accountants and advisors that understand this. And then if you're a tax professional or someone that's like dang, I've always worried how would I actually orchestrate that and pull this off for the client?

Speaker 3:

This is how you do it. I like that. Let's do some action items. Number one you're a business owner with an accountant. Go talk to your accountant right away and say, hey, I think I want to make and do that retroactive S election and I think we're leaving money on the table. Your account's going to do one of two things. This is again group number one. Your accountant's going to either go oh, that's way high to risk and oh my gosh, you can't do that. And you're, you're reasonable, comp's got to be much more and there's no savings and they're going to be freaking out why? Because they didn't bring the idea to you. They're nervous that you're going to say why didn't we do this last year? And they're worried about liability, exposure, embarrassment and a whole host of issues and guys, we do literally therapy with CPAs to get them over this issue. Or, number two your account is going to go oh my gosh, tom, thanks for bringing that. I love it.

Speaker 3:

Where can I learn more about this? Or where'd you hear about this? Oh well, mark Kohler and Matt Sorenson their podcast Main Street. Let me send it over to you. By the way, mark's got a bestselling book on this. By the way, they've got podcasts on this and videos on this in depth. Can you get up to speed on this? We'd really like to work with you moving forward, can you? Can we work this out together? Remember, you're the captain of your ship. In group number one, you have an accountant. If they don't do what you say, get rid of them. This is your ship, they're just your first mate. Throw them overboard and find a better accountant, which brings us to group number two. You didn't mention the network.

Speaker 2:

Yeah, I mean that's. I think it's just even. It's funny. I was at a networking thing the other night and people are like where do I go to find a good accountant? And like they listen to the podcast and they're like I'm like guys, there's a network of people that are getting certified and trained on this, that are helping clients strategize and plan and find these opportunities and do their tax work for them along the way too, and so that's where I send them and it's MainStreetProfessionals or I know you get there from MarkJCullercom, but what's the other direct way to get?

Speaker 3:

there. I think that's the easiest.

Speaker 2:

Just go to.

Speaker 3:

MarkJCullercom up in services. Go to the MainStreetTaxPro network and it's like just a list of like LinkedIn accountants from East Coast, west Coast, young, old, big, small, ea, cpa, everywhere in between. You can search for an accountant. They don't need to be down the street. So in group number two you may have to go there if your accountant's not on board in group one. But for those of you that don't have an accountant, get over there and start interviewing, doing discovery calls, and find an accountant in the network and say, hey, I want to do this. Is there a major deadline that you need to stress about? I'd say March 15th, because you got to file an extension for the 1120 S. You're going to have to file for 2024.

Speaker 2:

Good points, I was thinking April 15th, but you're going to be. You're trying to go back in time to say actually I was an escort last year, which moves you from April 15th up to March 15th.

Speaker 3:

Yes, if you don't do this by March 15th, you are going to have penalties. It doesn't mean you still don't do the retro, but then the IRS is going to go. Oh, you want to be a retro election. Where's your extension? Oh, I missed that. I was supposed to do it March 15. That you take action, I'd say in the next four weeks, don't delay. Meet with an accountant, hire one. Tell them let's get the election done. File your extension for March 15th. Breathe free and clear.

Speaker 2:

You can still do the workaround when it's time to file. That's freaking awesome. I was just like.

Speaker 2:

I know we talked about this with our attorneys and we you know, we have like a chat with all the attorneys and we meet and strategize and there's a little debate on some of this stuff and and that just like there's just a great summary of how to do it, and I the reason why I love the strategy is we're taking the tax law and trying to put it in your favor. We're trying to apply this to you and the IRS is giving you this rev proc option. But a lot of people are like well, it's messy, how do I execute and pull this out? Well, this is how you do it. That's what we're trying to do advocating for small business owners. Whether you are a small business owner, listening, trying to save on taxes, finding the right way to do it, you feel good about it. That makes sense.

Speaker 3:

Yeah, now I'm going to mention one last thing to the third group, which are you, the accountants out there, the tax got sent this recording, or you're just a regular listener, follower? Okay, now let's get detailed here too. Not only do we not want to take the QBI and the Schedule C, because that's too aggressive, we're going to pay our fair share. Now let's think through this a little bit further. Some of you are going to say well, hold it, mark, you get a deduction for half of the self-employment tax you paid. So if I pay 15,000 in self-employment tax on Schedule C, I get to deduct half of that. Yes, on the front page of your return, and that's going to save you income tax, but I'm still paying the $15,000. I'd rather only pay $7,000 rather than get a deduction for $7,000. See, when you start to put it in a spreadsheet, that deduction's helpful, it's true, it's not a clear. I'm going to spend $15,000 or spend $7,000. When you spend the $15,000, you're going to save a little bit over on the state and federal income tax because you get a deduction.

Speaker 3:

The second thing you may say well, mark, I'm going to get a bigger QBI deduction on that $100,000 and a Schedule C than if I do the split, because because now I'm only getting a QBI on 50 grand. Now, remember, qbi is a 20% deduction, so I'm going to get a deduction of $20,000 or a deduction of $10,000. Again, when you do the math on a deduction versus a tax, saving the tax is always better versus a tax saving the tax is always better. So that 20% deduction 10,000 that I miss I'm going to well make up for with the savings in FICA. So, as you can imagine, accountants, you start putting this in on a spreadsheet I'll give it to you. Yeah, you're going to see some incremental little savings on that original 15. I get it, the QBI and the self-employment tax deduction on the 1040, but it still doesn't beat the overall savings and, like Matt said, moving forward the savings starts to add up and go off the chart.

Speaker 2:

Yeah, now, this S-corporation strategy is something we've been teaching for years for clients and it is just like the bread and butter, really, of small business owner. The trick is when like the bread and butter really of small business owner the trick is when everybody's coming in late on this how do I get over there? Hopefully this helps you understand how you can get there. That's pretty detailed, I have to say, on how to do it, but well thought through, that's meeting this Red Proc requirement, figuring out how to actually get this over to the IRS. Pay your share so you can feel good about it but also get the advantage of the strategy in the prior year and it's not high risk.

Speaker 3:

It's highly effective, it's smart and it's okay to save taxes, it's okay to plan and we love this. We're grateful for you being here. We love Main Street business owners all over the country. This is a bedrock strategy Matt and I have taught for years. Thank you for listening. Talk to your tax advisor or you tax advisors, get over for a demo or discovery call at mortgagelorecom. Thank you everybody for listening and we'll see you next week.

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