Written by attorney Henry Daniel Lively

How is my Business Taxed if I Convert to A Corporation During the Tax Year?

It is a common event. You decide to incorporate your business, but you do not start the new corporation at the beginning of the tax year. How do you then report your business for tax purposes in the year of incorporation?

When you incorporate mid year you will actually report your income and expenses for the year of incorporation in two ways. Prior to incorporation you are a sole proprietorship and required to report the activity of your business on Schedule C of your Form 1040. In the year that you incorporate it is no different. For the portion of the year in which you were a sole proprietorship (prior to incorporation) you report that activity on Schedule C. Then, as of the date of incorporation you will need to open a bank account in the corporate name and new tax identification number. You will then need to instruct your customers to pay you under the corporate name and you will pay the corporate expenses with the new corporate band account. Be sure to instruct your vendors to invoice you under the new corporate name. All of the activity for the corporation is then reported on the corporate tax return.

In the subsequent year you should cease all activity as the sole proprietorship and only use the corporate entity for the business. As a result, no Schedule C will be required for the business. Be sure to check the box in the formation year that this will be the final Schedule C for the business.

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