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Former tax accountant here - one thing nobody mentioned yet about IRC Sec. 1377 elections is that sometimes neither option is clearly better for everyone. It really depends on: 1) When income was recognized during the year 2) When expenses were recognized 3) If there were any unusual transactions (asset sales, etc.) 4) What your personal tax situation is like In some cases, the remaining shareholders might want the election because the business lost money after you left (so they don't want to share those losses with you). In other cases, they might have had big gains after you left (so they don't want to allocate those to you). I'd demand to see month-by-month P&L statements at minimum before signing anything.
This is super helpful. They finally sent over some financial statements after we pushed back, and it looks like they had really uneven income - huge contract payment in April (after we left) and then pretty steady performance the rest of the year. Is there a simple calculation I can do to figure out my tax difference with vs without the election?
The quick-and-dirty calculation is: Without election: Take your ownership percentage ร (days you were owner รท 365) ร company's entire year income With election: Take your ownership percentage ร actual income during your ownership period only So if you owned 10% and were an owner for 59 days (through Feb 28), without election you'd get 10% ร (59 รท 365) ร full year income. With election, you'd get 10% of only what was earned through Feb 28. If that April contract was huge compared to Jan-Feb earnings, signing the election form would likely save you money. Remember though, the company's expenses matter too - not just income.
I had an issue with the IRC Sec. 1377 election last year and the remaining owners tried to pull a fast one on me. The key is to ask for the MONTHLY breakdown of: - Gross revenue - Major expenses - Any significant assets purchased/sold - Any debt taken on or paid off In my case, they were pushing hard for me to sign because they had major expenses coming in Q3/Q4 that would offset the income from earlier in the year. Without the election, I would have shared in those expense deductions. With it, they'd get all the deduction benefit.
Great advice. My company's CFO initially refused to provide monthly data when we asked. We had to have our attorney send a formal demand letter. Amazing how quickly the detailed statements appeared after that! Turned out they had accelerated some income before our departure and pushed expenses to after - totally trying to manipulate the situation.
Don't overlook a Health Savings Account (HSA) if you opt for a high-deductible health plan! I'm a solo attorney with an S-Corp and this has been a game changer for me. For 2025, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. The triple tax advantage is amazing - contributions are pre-tax, growth is tax-free, and qualified withdrawals are tax-free. I've been maxing mine out every year and using it as another retirement vehicle (you can invest the funds just like a retirement account).
Can you contribute to both an HSA and a Solo 401k in the same year? Or are there limits if you're doing both?
Yes, you absolutely can contribute to both an HSA and a Solo 401(k) in the same year! There's no limitation or reduction in contribution limits for having both. They're completely separate types of accounts with different purposes in the tax code. The HSA is tied to having a qualifying high-deductible health plan, while the Solo 401(k) is related to your business income. This is one of the big advantages of self-employment - being able to stack these tax-advantaged accounts in ways W-2 employees often can't.
One more thing to consider - since you're both employer and employee, you can set up a Section 125 Cafeteria Plan to pay for things like dental, vision, dependent care, etc. with pre-tax dollars. Your S-Corp should also be taking the home office deduction if you work from home at all.
I thought S-Corp owners can't participate in cafeteria plans? Something about 2% shareholders being excluded?
One thing to keep in mind about using the Direct Payment method for extensions - make sure you keep the confirmation number they give you! I learned this the hard way last year. The IRS somehow lost track of my extension payment in their system, and when I got a failure-to-file notice with penalties, I had no proof I'd made the payment. Took months to sort out with multiple phone calls. Now I screenshot everything and save confirmations as PDFs.
Is there a way to check online if your extension was properly processed? I made a payment two weeks ago but I'm paranoid now after reading your comment.
Yes, you can check if your extension was processed by logging into your online account at IRS.gov. Go to the Tax Records section and look for the account history or payments section. You should see your extension payment listed there with the correct tax year and payment type. If you don't see it after about 5-7 business days, I'd recommend calling the IRS to confirm. Better to deal with it now than months later when penalties might have accumulated.
I'm a bit confused about something... if I file an extension this way, is October 15th the new deadline for BOTH filing my return AND paying any remaining taxes I owe? My tax situation is complicated this year with a new business.
This is a common misunderstanding. The extension only gives you extra time to FILE your return (until October 15th), not extra time to PAY what you owe. Any tax you owe is still due by the original April deadline. That's why you make an estimated payment when requesting the extension - to cover what you think you'll owe. If you don't pay the full amount you end up owing by the April deadline, you'll face interest charges and possibly penalties on the unpaid portion, even if you filed an extension.
Another potential issue - double check if you're contributing the same amount to retirement accounts at your new job. When I changed jobs, I didn't realize the default 401k contribution was lower at my new company. This meant more of my income was taxable, which reduced my refund significantly. Took me months to figure out why my refund was so different!
That's a really good point! Also, check if you're getting the same pre-tax deductions for health insurance and FSA/HSA contributions. My refund was way different one year because my new employer's health plan was $150/month cheaper, which meant $1800 more taxable income that year.
Yes, health insurance premiums are definitely something to check too! In my case, my premium went from $220 pre-tax at my old job to $180 at the new one, which added about $480 in taxable income for the year. Another thing I discovered was that my old job had automatically enrolled me in commuter benefits that took about $100/month pre-tax, and my new job didn't have that program. Small differences like these can really add up and affect your withholding and final tax bill.
Did your old job give you any bonuses or have overtime? I had the same issue last year and it turned out my previous tax return included a $2000 bonus and about 50 hours of overtime that had higher withholding rates. My new job pays the same base salary but without those extras, my refund was way smaller.
You know what, this might be part of it too! My previous job did include some overtime during our busy season, maybe 3-4 hours a week for about 2 months. My new position is strictly 40 hours. That combined with the W-4 changes everyone mentioned probably explains the difference. Thanks for pointing this out - I hadn't even considered the overtime factor.
Mei Lin
I work at a university international student office and see this EXACT situation at least 5 times every tax season. International students/scholars get terrible advice from "recommended" preparers who claim false credits. DO NOT PAY THIS PERSON. File your amended return correctly, specifically noting that the original was filed incorrectly by the preparer without your knowledge or consent. Include Form 8275 (Disclosure Statement) with your amended return explaining the situation in detail. For future reference, many universities offer free VITA (Volunteer Income Tax Assistance) programs that specialize in nonresident tax returns. Many can help remotely even if you're no longer in the US.
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Liam Fitzgerald
โขThis happened to me too. My VITA preparer was amazing and fixed everything. One question - doesn't amending mean the OP will get a smaller refund since the fraudulent credits will be removed?
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Amara Nnamani
Regardless of what you do with the IRS, make sure to file a complaint with your state's board of accountancy if the preparer is a CPA. If they're an enrolled agent, report them to the IRS Office of Professional Responsibility too.
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