Tax & Accounting Blog

Driving Revenue With UltraTax CS Data Mining, Part 3: Identifying Sole Proprietors Who May Benefit From an S-Corp Reorganization

CS Tax & Asset Management Solutions June 24, 2014

Reorganizing from a sole proprietorship to an S-corp is a tried-and-true way for certain successful small businesses to reduce their unemployment tax burden. Just as importantly, it can be a good way for you to generate additional revenue. 

UltraTax CS Data Mining makes it easy to find clients who may be good S-Corp candidates, who you can then notify with a letter or an email. Sending out these kinds of notifications is a win-win proposition; you increase revenues, clients who reorganize save big, and even the clients who don’t choose to reorganize will be impressed that you’re looking out for them. 

I’ve found that the easiest way to find S-Corp candidates is to search for clients who make profits in excess of what the IRS would consider a reasonable wage. These clients can often avoid self-employment tax on those excess profits. 

Below, I’ve outlined the steps for creating a search to find sole proprietor clients who make profits above a given threshold. I’ve also included instructions for creating a report that lists exactly how much excess profit each client generates. This can be handy for zeroing in on which clients are the best candidates for reorganization. I’ve used $75,000 as the income threshold in the example below, but of course this amount may vary depending on your clients’ individual circumstances.

Creating a search and corresponding report for sole proprietors who may wish to consider an S-Corp

To provide a quick reference to not only those clients who exceed this threshold, but also a quick reference as to the actual Schedule C net profits for each of those clients, we’ll create both a custom search and custom report.

  1. In UltraTax CS, choose Utilities > Data Mining.
  2. Select the 1040 Individual database if it is not already selected, and click Continue (Step 2).

Creating the Custom Search

  1. In the Print Selection and Clients Search dialog, click the Add/Modify Searches button.
  2. Click Add.
  3. Enter a search name at the top, such as “Sole Proprietors netting > $75,000.”
  4. Click the Calculated value option, then click the Add/Modify button immediately below.
  5. Scroll through the list of calculated values and highlight the Sch C, Ln 31 – Net Profit or Loss (Tp) value.
  6. Click the Another button.
  7. In the Operator field (in the lower pane), select Greater than or equal from the drop-down list.
  8. Ente r75,000 (or other appropriate threshold amount) in the Value in Field field.
  9. Click Enter.
  10. Repeat steps 5-9, but select the Sch C, Ln 31 – Net Profit or Loss (Sp) value, and use the same amount you used in step 8.
  11. Click Done.
  12. In the Select Criteria dialog, highlight and select the following values to the right pane:
    • Sch C, Ln 31 – Net Profit or Loss (Sp) > 75000
    • Sch C, Ln 31 – Net Profit or Loss (Tp) > 75000
  13. Click the Edit Formula button.
  14. In the Edit Formula dialog, click the OR option at the top of the dialog.
  15. Click Done to finish editing the formula, click Done again to finish defining the custom search, then click Done a third time to close the list of searches.

Creating the Custom Report

  1. In the Print Selection and Client Search dialog, click the Design Custom Reports  button, and then click Add.
  2. Enter a description such as “Sole Proprietors netting >$75,000.”
  3. Select 1040 Client List w/Invoices from the Template drop-down list, then click Continue.
  4. Select Federal from the Product drop-down list (the field defaults to General).
  5. Scroll through the list and select both the SchC, Ln 31 – Net Profit or Loss (Sp)  and Sch C, Ln 31 – Net Profit or Loss (Tp) values to the right pane.
  6. Adding these values makes the report too wide for print. To correct this, highlight the following values in the right pane and click theremovebutton to removeeach of them:
    • Complexity factor
    • Client invoice number
    • Client TIN
    • Net invoice amount
  7. After removing these values, a preview of the report displays at the bottom of the dialog, indicating that the report will print. Click OK, then click Done to close the list of custom reports.

Tying the Custom Report to the Custom Search and running both

  1. In the Print Selection and Client Search dialog, click the Add/Modify Searches button.
  2. Locate the Sole Proprietors netting >$75,000 report, click the drop-down list in the Recommended report  column, and select the custom report you created in the previous section. Now, when one of these items is selected, the other will be selected as well (although you can always make changes and you do not have to use these items together).
  3. Click Done to return to the Print Selection and Client Search dialog to see that both the report and search are selected.
  4. After selecting the appropriate output, click the Continue (Step 3)  button to determine which clients fit the criteria. You will have the opportunity to print the Sole Proprietors netting >$75,000  report, which you can use to review the extent to which any sole proprietors exceed the threshold of a reasonable wage.

Come back on July 8 for my next blog entry, where I’ll show you how to use UltraTax CS Data Mining to find clients who may be good candidates for retirement planning services. Until then, feel free to post your questions and comments below.