The IRS recently announced that, like last year, the 2012 deadline has been extended to April 17, 2012. I’d like to say it was because they just felt like being nice, but I’d be lying. They extended the deadline because April 15 happens to be a Sunday, and Washington DC observes Emancipation Day the very next day, on April 16.

If you plan on filing an extension, be careful. The due date for extended returns will be October 15, not 17.

While we’re at it, here’s another date for you: January 17. That’s the first day you can e-file your returns.

Now, at the risk of sounding like mother hen, there’s no reason you have to wait until any of these dates to actually prepare your return. And by all means, don’t wait until April 17 to call your tax accountant for an extension. It drives them crazy. Trust me on this.

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You’ve heard of S Corporations. Your neighbor’s company is organized as an S corporation. And you’ve heard him go on an on about how awesome S corporations are. You’ve heard just about everyone (and their mother) tout S corporations as being the perfect entity. And they are—in certain situations.

You see, choosing an entity takes care and consideration and no entity qualifies as one-size-fits-all. So while an S corporation may be awesome for your neighbor (and his mom), the same may not be true for you.

When is organizing your company as an S corporation ideal? And just what makes them so awesome?

For starters, S corporations, unlike regular corporations, aren’t subject to double taxation. Regular corporations pay tax on income, and then you, as a shareholder, pay tax on the profits distributed to you (known as dividends). S corporations don’t pay income tax (though they may be subject to other taxes). The income is simply “passed through” to each individual shareholder, who then reports his share of income on his personal income tax return. The corporation can then distribute profits to each shareholder tax free (so long as there’s sufficient basis). Therefore, any amount distributed by the corporation to each shareholder is only subject to tax once.

This pass through nature of the S corporation is one of the reasons the entity can be ideal in some tax planning situations.

Here’s one situation where an S corporation may be ideal:

For some companies, particularly in the early years, the company may be operating at a loss. Each individual shareholder gets their share of this loss (assuming there is enough basis), which can then be deducted on their personal income tax return. This can be used to offset income that otherwise would’ve been taxable. And since S corporation owner-shareholders are supposed to pay themselves a reasonable salary, this loss can even be used to offset the wages paid to you by your company. Awesome, indeed.

There’s more… S corporations are eligible for Section 1244 treatment. So, let’s say this startup of yours is unsuccessful and the stock is later disposed of at a loss. This loss is allowed to be categorized as an ordinary loss, instead of what normally happens: treating the loss as a capital. Categorizing it as a capital loss means you can only net it against other capital gain or be limited to a $3,000 annual deduction. Being allowed to categorize the loss as ordinary means that the entire amount can be deducted at once.

Here’s another:

Quite the opposite of the above scenario, your company is very successful and actually has quite a bit of cash on hand. Your company’s future is looking pretty good. With a regular corporation, if you were going to distribute some of this wealth to shareholders, it would be ideal to be able to classify this as salary and not as dividends. Why? Because salaries, unlike dividends, are deductible to the corporation and they are taxable as ordinary income to the shareholder. The IRS, being the IRS and all, is obviously aware of this and is notorious for reclassifying unreasonably high compensation as dividends.

However, with S corporations, this isn’t necessarily an issue. And organizing as such minimizes any issues you’d have with unreasonable compensation. You either pay this as a salary (deductible by the corporation) or as distributions (not deductible by the corporation, but not taxable to the individual shareholder either).

The above situation is especially ideal when the corporation is a personal service corporation (PSC). PSCs are those companies that:

1. At least 95% of the the time spent by the company’s employees is devoted to services in either the health (including veterinary), law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and
2. At least 95% of the stock is held directly (or indirectly) by either the employees performing these services or retired employees who did perform these services or their estates, or any other person that in the two-year period starting with the date that such an employee died, acquired that individual’s stock because of his death.

That was a mouthful.

So, if my company was organized as a regular corporation, I’d be considered a PSC. So would my family physician, my dog’s vet, the architect that designed the building I live in, that ballet company… you get the idea.

This is important because PSCs are subject to a flat tax of 35%. That’s right, no graduated rates for PSCs. It would therefore be beneficial for the company to be organized as an S Corporation. Not only does the S Corporation get rid of that dreadful flat tax of 35%, it is free to distribute enough of the accumulated cash to each shareholder to pay the tax they’d be subject to (remember: income of the S corp. is passed through to each shareholder).

Let’s look at a few situations where you’d probably want to stay away from an S corporation.

As mentioned before, S corporations are pass-through entities, so the income is reported on each individual shareholder’s personal income tax return. Depending on the marginal tax rate, sometimes the tax can be cheaper when using the corporate tax rates than the individual. So it would make more sense to be organized as a regular corporation and have the corporation pay the tax.

Another situation is with fringe benefits. Fringe benefits of closely-held companies are normally taxable to an S corporation’s shareholder-employees. Again, another situation where you’d probably want to be a regular corporation.

Another reason you may want to stay away from S corporations is if you are looking for investors. Investors prefer regular corporations because S corporations aren’t allowed to have more than 100 shareholders, and they are limited to one class of stock, which means… no preferred stock.

Now, this obviously isn’t all inclusive. The point is, don’t just go out and form an S Corporation (or any entity for that matter) because someone told you to. The important thing to do before you create your entity is have some kind of understanding of the direction your company will likely head in and what’s important to you (investors, flexibility, lower income tax, etc.) and chose an entity based on that. And for goodness sake go talk to a decent tax accountant. Who probably isn’t your neighbor.

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Let’s say you had a certain amount of money deposited into your bank account unexpectedly… what would you do? What would you really do? What if the amount was only $50? What if it was $110,000? What if the amount was deposited by the IRS (or the Treasury)?

Would you try to figure out why it was deposited into your account? Or whether the funds actually belonged to you?

Or would you say nothing and just hope no one would notice there was a mistake made?

Or would you go out and spend it on your student loans, car payment, and foreclosure debt?

If you asked Stephen McDow, he probably would have answer yes to that last one.

You see where I’m going with this, right? McDow had $110,000 deposited into his account. He wasn’t expecting the money, and I’m willing to bet that not so deep down he knew that the money didn’t belong to him. Turns out that the money that was deposited into Mr. McDow’s account was actually a refund belonging to another taxpayer. Apparently, that taxpayer provided her accountant with information for a Citibank account that was closed in 2004. Citibank later reissued that account number to Mr. McDow.

After obtaining an e-mail address for McDow, the taxpayer had her attorney send him an e-mail with instructions to return the money. To which he responded that he’s already spent some of it—on student loans, a car loan, and a home loan, to be specific.

Mr. McDow apparently offered to make monthly payments, but let’s just say that that offer wasn’t accepted since the rightful owner reported the theft to the police.

McDow has since been arrested.

Who knows what was going through his head, but I just find it hard to fathom that someone can have that much money deposited in their account and not try to ensure that it really did belong to them. It’s one thing if you’re expecting it, but quite another to have that money mysteriously appear in your bank account one day.

Also, I guess I also don’t understand how someone who is expecting such a significant refund doesn’t bother to verify that the account number is correct before giving it to her accountant. The account was closed in 2004. I get that nowadays we rarely use checks and payments are withdrawn from your account automatically, but it was closed in 2004. 2004.

Apparently finders aren’t keepers.

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