Sec. 754

[David]

New client bought out other 5 LLC members in 2011 and is making a sec. 754 election. I have never dealt with a sec. 754 election.

None of the research information explains the mechanics of adjusting the basis of assets. The client has hundreds of fixed assets. Surely, the basis of each asset doesn't have to be adjusted does it?

Is the 754 adjustment entered as a one line adjustment described as "Sec. 754 adjustment" for each class of asset (5 yr, 7 yr, etc.)? If so, does depreciation start over effective with the 754 adjustment? What about assets that are already fully depreciated? Are these adjusted as well? Is the adjustment allocated according to the original cost of the assets or the nbv?

It seems as though only the basis of fixed assets would be adjusted since other assets and/or liabilities would remain at their current value. Is this correct?

Thanks for your help.

[kcjenkins]

Here is a link to a good answer to some of your questions:

http://answers.yahoo.com/question/index?qid=20080228074643AARVYSs

Some other links that might be useful:

http://www.cbmslaw.com/articles/226

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2011/CPA/Jun/PartnershipBasis.jsp

Some good examples in this one:

http://www.thefreelibrary.com/When+to+advise+a+Sec.+754+election.-a012350972

And finally, I found this one useful :

http://www2.gtlaw.com/pub/articles/2006/steinbergt06a.pdf

[David]

Thanks, KC.

I use Intelliconnect tax research and I couldn't find near as much information as these links. I must not be using the search feature correctly....

Since my client bought out the other 5 LLC members, the LLC was technically terminated. It appears from reading the information in your links that the sec. 754 election should have been made with the final tax return filed for the technically terminated LLC. The date on the final tax return was through 7/31/11 and I prepared that tax return.

Since the election wasn't made it appears that my client can make the election on his new tax return with a short year of 8/1/11 - 12/31/11. However, I read that when a partnership is technically terminated, a step up in basis is required. Am I reading that correctly? Therefore, a sec. 754 election doesn't need to be made in order to apply a step up in basis?

Another issue is that my client wants to elect to be taxed as an S Corp. He kept the same company name and EIN. We filed the extension as an S Corp and plan to elect the S Corp status utilizing one of the appropriate rev-procs when we file the 1120S.

The sec. 754 election appears to use all 1065 related forms. How do I file the sec. 754 election when filing the 1120S?

After reading through the information in the links, it still isn't clear if the step up in basis is allocated to every single fixed asset (the company has hundreds of assets) or if the step up is allocated to class of assets - e.g. 5 yr., 7 yr., etc.

Those who have dealth with a sec. 754 election, please let me know how the mechanics of the allocation work. Every example only shows 3 or 4 assets and none are fixed assets.

Do the existing assets continue to be depreciated as before and the step up is one lump number for that class of asset, say 5 yr property, and depreciation starts only for the step up amount?

Sorry to ask so many questions but it seems as though the examples and research material only show allocations to 3 or 4 basic assets and not real life assets such as hundreds of fixed asset items.

Thanks.

[SaraEA]

The partnership is terminated, so there is no need for a Sect 754 election. The assets transfer to the new company I believe at FMV (just like when you start a a new company). The 754 is usually used for partners who enter the partnership later in the game, e.g., the partnership owns a building that it bought for $100k that is now worth $300k. The new partner paid for that appreciation and gets to depreciate more than the others. And the election only applies to the individual partner. It does not affect the partnership's asset values or depreciation schedules. I have one family partnership that started before I was born, and as each of the originals died his or her share got a stepped up basis for the heirs who inherited that share of the entity. Every partner now has different depreciation, but not the partnership. If you don't do their tax returns you don't have to worry about it. You can calcuate it for them and enter it in box 13 I believe of their individual K-1 (code W). If you are asked to do that, you can certainly charge for the extra work (and it is a lot of extra work). Sometimes the partnership assumes the cost, but the individual partner gets an equivalent amount added to his or her distribution.

But you have a brand new, single-owner company. No election possible.

[kcjenkins]

I agree with Sara, the time for the election is past. Should have been done on the final LLC 1065, if it was going to be done. But really, no need to do it at all, then or now. Since the partnership is no longer, the issue of partner's allocations within the partnership is no longer relevant. That is why the election applies only to partnerships. In the new Corp, the assets are brought in at the price allocated when he bought out the other partners. I suggest you use Form 8949 to group the assets sold and assign the purchase price accordingly.

[David]

Thanks for your help.

My new client's former CPA told him to make a sec. 754 election to get the step up in basis. Is this because the previous CPA thought my client would continue as an LLC instead of electing to be taxed as an S Corp?

I just don't want this to backfire and the IRS not allow the step up in basis if the election isn't made.

So the step up amount isn't reported separately and depreciated separately? Someone had mentioned before that that is how the step up would be handled. Instead the asset is revalued (even if it was previously fully depreciated) and depreciation starts over?

KC, you mentioned using Form 8749. I can't fnd that form. Did you mean another form?

Thanks.

[kcjenkins]

Sorry for the typo. It's 8949