Biggest Mistakes Made by Owners of Inactive Companies

New York State's Department of Taxation and Finance has been cracking down on "inactive" corporations and LLCs lately.  They are targeting companies that have failed to file tax returns because they claim to have had "no business activity."  And once they find a culprit and collect their penalties, interest, and filing fees, they typically turn their findings over to the IRS.

The biggest mistake made by Smithtown business owners who own a corporation or an LLC that is inactive is that they assume that since they had "no activity" they do not have to file a tax return.  The easiest way to avoid penalties, interest and higher filing fees is to simply hire a Certified Public Accountant to prepare your annual tax return.

In addition to simply not filing, claiming that your company is "inactive" is the second biggest mistake. In New York State, you will end up paying a higher annual filing fee if you claim that your corporation was "inactive." 

The main problem here is a simple case of terminology. I see many small business owners who think "I had no income" means that their company was "inactive."  However, if they incurred expenses, start-up costs, purchased equipment, opened up a bank account, used a business credit card, or had any other type of activity, their company is not actually inactive and may not be subject to the higher annual filing fees charged to actual inactive companies.

Take an example of business owners who set up New York S Corporations, don't start conducting business right away and decide not to file tax returns for their first two years in business:

• The penalty for not filing a federal tax return is $89 per month that the return is late (typically capped at 12 months). When the owners ultimately realize that they need to file a tax return, they will end up paying a $1,068 late filing penalty plus 8-12% interest.
• The penalty for not filing a NY state tax return and not paying the appropriate corporate tax will be approximately $250 plus 8-12 percent interest.
• NY is one of those states that "penalizes" a corporation for being "inactive."  An inactive corporation could end up paying a corporate tax of up to $800, while if they were deemed active, their corporate tax would have only been $25.

So, these New Yorkers who setup their S Corporations and decided that they didn't have to file corporate tax returns are now out $1,500-$2,500 when they could have just paid a CPA $250-$400 to prepare "minimal activity" or "inactive" corporate tax returns.

Remember, if you own a corporation or an LLC, you must file a tax return every year, even if you claim to have no activity.