Corp to Non-Profit

[Painter1]

I just took over the admin & accounting duties for one of the planes I am a partner in and would welcome some help on a structure and tax issue.

The plane, a 1977 PA32 is held in an S corporation. The problem is, as I see it, we unfairly are paying income taxes on our own money when we contribute to the engine fund. The 2015 tax return shows that money as ordinary income which is equally distributed to each shareholder via K1's

I also own a share of an RV6 and that is set up as a non-profit Corp. We just fill out a postcard for a tax return with no payments. But that was done long ago by a guy who is no longer part of the group.

Can an S Corp be converted to NP? Or is there another way to set aside engine fund money without it being taxed?

 

[airdale]

Well, if you book the engine fund contributions as additions to owner equity/additional capital contributions then you don't have to pay income tax on them. That's what they are. You are topping up assets (cash) to compensate for wasting assets (engines).

Check your state rules on nonprofits. It's possible you might have to convert to "C" -- I don't know. For nonprofit status, 501(c)7, you pay a fee to file an application with the IRS. I used to keep the books for a large C-corp club; our fee was $500 and the wait for approval was 6 months.

 

[coloradobluesky]

Where people run into trouble with 501 3 C non profits is when they break up. You can't just take the assets back and go home. The IRS makes you DONATE the assets to another 501 3 C!

 

[midlifeflyer]

Where people run into trouble with 501 3 C non profits is when they break up. You can't just take the assets back and go home. The IRS makes you DONATE the assets to another 501 3 C!

I don't think he's talking about a charitable non-profit. Just an organization formed for non-business purposes rather than to make money. You know, like an airplane for personal use co-ownership. I think the nonprofit Corp form has been used more in some states than others and has probably declined as the use of LLCs became more common. But it is used.

@Painter1, I don't get involved in accounting issues but suspect @airdale is correct. You might be better off discussing with an accountant booking this stuff in a way that does not result in income taxation, as opposed to changing the form of entity, which I suspect will be more trouble than it is worth.

 

[denverpilot]

I'd also agree that accounting correctly for it is necessary.

It's not "income" when it's covering operating expenses, IMHO. YMMV. IANAL. Check with the accountant. Etc.