This is super helpful! I didn't even think about the merchant services agreements. Do you have any recommendations for handling the transition period? Did you run both the old and new entities simultaneously for a while, or was it a clean cutover?

I did a phased approach where I ran both simultaneously for about 2 months. I set January 1st as my official transition date for tax purposes, but started setting up the new entity and accounts about 3 months prior. For merchant services, that was actually one of the trickier parts. Some processors treated it as a brand new business application despite having the same owner, which meant new rates and terms. I had better luck explaining it as a "restructuring" rather than a new business. Keep your processing statements handy to show history. I'd suggest creating a detailed timeline working backward from your target date. Also, create an entity-specific email address for all the new accounts rather than using a personal email - keeps everything organized during the transition.

I did this last year. Beyond Form 2553 for the S-election, you'll need: - SS-4 for your new EIN - Form 8832 if you're forming an LLC first and then electing S-corp status - Schedule D for each Schedule C business you're closing to report any asset transfers - Form 4562 for depreciable assets being transferred The trickiest part was making sure I properly documented the value of all business assets transferred to the new entity. The IRS can be picky about this if you're audited.

Thanks for the detailed response! That's really helpful. Did you handle the valuation of your business assets yourself or did you need to get professional appraisals? I'm worried about undervaluing things and causing problems down the road. Also, did you create a formal business plan for the new entity? I've heard that can help if there are ever questions about business purpose for the reorganization.

This is such an important point! I didn't do this for my mother's helper and got hit with a surprise bill from my state's department of labor. They actually found out when the caregiver applied for unemployment after my mom passed away.

Do you think it will ever change? Seems like every administration promises tax simplification and it just gets more complicated.

I'm not optimistic about major simplification happening anytime soon. There are too many special interests benefiting from various parts of the tax code. Every tax break has a constituency fighting to keep it, and politicians use the tax code to deliver benefits to their supporters. Plus, the tax preparation industry actively lobbies against simplification - companies like Intuit (TurboTax) have a financial interest in keeping taxes complicated so people need their services. Other countries have shown it's possible to make taxes simpler, but it would require political will that seems lacking in our current environment.

Since the 2017 tax law changes, the standard deduction got much higher ($13,850 for single filers in 2023). Unless you have a mortgage with significant interest, pay high state/local taxes, have major medical expenses, or give a lot to charity, standard deduction is usually better for most people making around $75k. I've done both, and honestly, for my situation ($83k income), the standard deduction has been the better option the last few years. Save yourself the headache of tracking everything unless you know you're close to exceeding the standard deduction threshold.

Interesting approach! What portion of your total compensation (salary plus distributions) does your $275K salary represent? I'm trying to figure out if there's a reasonable percentage that's generally considered safe.

My total compensation breaks down to about $275K salary and $180K in distributions, so my salary represents about 60% of my total compensation. My tax advisor said there's no magic percentage that's automatically "safe," but that the higher the percentage of your total compensation that comes as salary, the less likely you are to face scrutiny. He did mention that for medical specialists, keeping salary at least 50-60% of total compensation is a good starting point, but it really depends on all those factors others have mentioned - including local market rates for your specialty, your experience level, hours worked, and practice complexity. Every situation is unique, which is why documentation of how you arrived at your number is so important.

I went through one 2 years ago for my orthopedic practice. It was intense. They wanted EVERYTHING - industry salary surveys, time logs showing how many hours I worked, documentation of my education/experience, compensation data for other doctors in my practice, historical salary info, etc. The most helpful thing was having a formal reasonable compensation study we'd done when setting up the practice. The auditor still adjusted my salary up somewhat (from $280K to $320K), but accepted most of our position because we had documentation showing how we arrived at our numbers. Without that study, I suspect they would have reclassified all my distributions.

That's really helpful info, thanks for sharing. Sounds like the key is having documentation ready before any audit happens. I think I need to be more proactive about this.

This sounds promising! How long did the process take when you used the Taxpayer Advocate Service? And did you need to provide a lot of financial documentation?

The whole process took about 2 months from my initial contact to getting a revised payment plan. They do require quite a bit of documentation - I had to provide bank statements, pay stubs, a detailed list of monthly expenses, and proof of my housing costs and medical expenses. They assigned me a specific advocate who worked directly with me throughout the process. The most helpful part was having someone who could explain the various relief options in plain English and who actually seemed to care about finding a solution that worked for my specific situation. Much better than trying to navigate the general IRS channels where you rarely speak to the same person twice.

This! I switched from doing a Schedule C to forming an S-Corp after my 1099 income hit about $80k, and it saved me a ton on self-employment taxes. You still pay yourself a reasonable salary that gets employment taxes, but can take the rest as distributions that aren't subject to SE tax. Might be worth looking into if your 1099 income is substantial.