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Transfer of asset from multi member LLC to single SH S Corp


David

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TP has a restaurant in a two member LLC. He also owns other restaurants in S Corps where he is the only shareholder.

The LLC purchased a food truck in 2015 and deducted sec 179 for the full value. Therefore, the truck is fully depreciated.

The TP wants to transfer the food truck from the LLC to one of his S Corps that has catering activities.

I can't seem to find any cites that address how this transaction should be reported and the tax implications of the transfer.

What is the best way to handle this so the other LLC member is made whole on this situation?

Thanks.

 

 

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If he transfers the truck, it would be considered a distribution to him at FMV and the 2-member LLC would report the gain taxed at ordinary rates.  I forgot to ask if there is a liability against the truck, and if so, that would reduce the amount of the distribution.

Could the S corp actually purchase the truck from the 2-member LLC for its FMV? That would bring cash into the LLC that could be distributed to the owners to help cover the tax effect.  I think that this LLC wouldn't be prevented from structuring this as an installment sale since your client owns exactly 50% and not "more than 50%", meaning that the S corp isn't considered a related party.   If I'm wrong on that, someone here will correct me. 

If the S corp doesn't have the resources to purchase it, what about the S corp leasing the truck from the LLC?  Would that be something they'd consider?

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Thanks everyone for your help with this.

There is no debt for the vehicle. The LLC is reporting as a partnership.

I thought assets could be transferred out of an LLC with no deemed taxable event. Is the issue that it is a transfer from a 2 member LLC into a 1 shareholder S Corp owned by one of the LLC members? 

The TP who wants to transfer the vehicle to his S Corp is willing to pay the other LLC member for half the value of the food truck. However, since the LLC owns the vehicle, the payment would have to be to the LLC and not the LLC member wouldn't it?

I understand that the cleanest way to report this is for the S Corp to purchase the vehicle. However, I thought there was a way to transfer the vehicle and not have a taxable event for either LLC member. 

Yes, I am planning to give the TP options which will include the S Corp leasing the vehicle from the LLC. Thanks for giving options. If there are other options for this type of situation I would appreciate any input.

Thanks.

 

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OK, I need to clarify and change my answer slightly since the wording of the initial post made me think that the LLC was also reporting as an S corp. I reread it and see that it wasn't stated how the LLC was reporting, and now clarified that it is a partnership.

Now that we know it's a partnership, with that in mind and this asset is handled as a distribution, under sec 732 the asset comes out at its adjusted basis, not at FMV, the partnership would not recognize gain on distribution, and the individual receiving the asset picks up the asset's carryover basis. In this case, the basis of the food truck in the hands of the individual would be zero. 

I don't have any other suggestions other than the purchase or lease ideas, but maybe someone else does. I only wanted to clarify the points above and to correct my original answer. 

Disclaimer - the above discussion pertains to only this particular situation where the asset was originally purchased by the partnership and is fully depreciated to zero. The answers would be entirely different in cases where an asset had been contributed to the partnership, or where the asset still has basis that exceeds partner's basis in the partnership, etc.  Not getting into those hypothetical discussions here. 

 

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Thanks, Judy.

So the S Corp would pick up the asset at zero basis? And the distribution is made at zero value to the LLC member who is transferring the asset to his S Corp?

I know the TP wants to make the other LLC member whole by paying him something. However, isn't the other member made whole in that he was able to take 50% of the 179 deduction and won't have to pay a gain when the vehicle is sold at a later date?

Thanks for your help with this.

 

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19 hours ago, David said:

So the S Corp would pick up the asset at zero basis? And the distribution is made at zero value to the LLC member who is transferring the asset to his S Corp?

 

The distribution out of the partnership comes out at adjusted basis, in this case it would be zero.   For tax purposes, the S corp's tax basis in the truck in this case would also be zero. 

 

19 hours ago, David said:

I know the TP wants to make the other LLC member whole by paying him something. However, isn't the other member made whole in that he was able to take 50% of the 179 deduction and won't have to pay a gain when the vehicle is sold at a later date?

 

The other LLC member might have problem with that!  Right now before any transfer take place, the 2 LLC members have received equal treatment so far: they both shared in the purchase and in the sec 179 expensing of the truck.  BUT, while the basis is zero and the transfer out doesn't change either of the LLC members' capital account balances, the partner receiving the truck is getting 100% of something of significant value for which he only "paid" for 50%.  As a hypothetical to make the point - What if he never contributes the truck to the S corp and instead turns around and sells it outright and pockets all of the proceeds for himself? Don't you think that the other LLC member would have more than a slight problem with that?

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Good point, Judy. 

In order for this to be reported correctly, the amount paid by the TP has to be deposited to the LLC's bank account and reported as a gain on disposal. I'm sure there is a way to allocate the gain 100% to the other LLC member, isn't there?

Thanks for your help.

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Just to make a point.  The basis of the vehicle in the LLC might be zero but the important basis is what is the basis in the hands of the receiving partner.  Example, if this was the only asset in the partnership the basis would be whatever basis the partners basis in the partnership was.  True the depreciation basis when contributed to an S-corp would be zero due to related parties.  In this case even if the S-corp purchased the truck it still most likely has a zero basis for depreciation in the S-corp due to the rule of anti-churning.

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