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Partners' equipment contributions


David

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I have 2 clients who used to have separate Sch C businesses and decided to form an LLC and go into business together. They transferred all of their equipment into the LLC. There is a huge number of items. 

I have the depreciation schedules from each of their prior year Sch C businesses so I have the net book values. 

Since there are so many assets, they don't want to go to the trouble of assigning FMV to each of the assets transferred in.

Before I try to convince them to give me the FMV of each asset I want to know if there is a problem if I don't assign additional capital to each member based on the difference between FMV and NBV? I know that when the LLC sells the equipment, the gain will be greater to the LLC, which will be allocated 50-50 to each member anyway. Maybe the difference isn't material between that method vs.each member reporting the difference between FMV and NBV as gain on their individual tax return and the LLC reporting gain based on the difference between selling price less current FMV?

Has anyone dealt with this issue before? How did you handle it?

Thanks. 

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44 minutes ago, Lynn EA USTCP in Louisiana said:

Why were they not transferred in at net book value?

 

They are and the depreciation is continued. However, the basis of the assets to the partnership is supposed to be the FMV at the date of contribution.

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Thanks, Abby Normal for the link. That supports the treatment I want to do. However, since the LLC members don't want to assign the FMV to all of the assets, I'm wondering if it is a problem just to transfer the assets at NBV and continue the depreciation.

Has anyone dealt with this situation and found that it really didn't matter?

Thanks.

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39 minutes ago, David said:

They are and the depreciation is continued. However, the basis of the assets to the partnership is supposed to be the FMV at the date of contribution.

No, the basis of the equipment is its transferred-in basis, as is its holding period, and depreciation is calculated on that.  You only increase the value if the partner is going to recognize gain. Do you have that situation that requires gain recognition or do the assets have liabilities attached to them?  Maybe this link spells that out more simply: http://sherayzenlaw.com/cash-and-property-contributions-to-partnerships-and-their-affect-on-a-partnership-interest/

What you will have is a disconnect between the depreciation basis of the asset (that is also the contributing partner's tax basis) and his capital account (that is the FMV of the asset contributed).  The following article is excellent and has examples of the contribution by 2 partners and how that is recorded, and goes on to show the effect on basis and capital accounts of each partner when a contributed asset is later sold: https://www.forbes.com/sites/anthonynitti/2017/08/15/tax-geek-tuesday-applying-section-704c-to-contributions-of-property-to-a-partnership/#5f60cc3b44ca

Is this the same Sch C to LLC conversion that you asked about back in late July in this topic?  If so, reviewing that discussion again may also be helpful. 

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On 11/1/2017 at 3:43 PM, jklcpa said:

Is this the same Sch C to LLC conversion that you asked about back in late July in this topic?  If so, reviewing that discussion again may also be helpful. 

Yes. My question now wasn't asking the same question I had in July. I was Okay with the help you, Jack and others gave me regarding transferring assets at the LLC member's basis and booking the difference between FMV vs member's basis as non-depreciable assets on the LLC's books so that the member's capital accounts could be properly recorded.

My question now is what have any of you done in this situation when neither of the LLC members wants to go to the trouble of giving the FMV for the huge amount of assets transferred into the LLC?

If the FMV is about the same as the NBV, then there shouldn't be a problem. But if it isn't approximately the same, then each member isn't getting the proper amount of capital credited to them.

Sorry to cause any confusion.

 

 

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