Vityaba Posted January 18, 2014 Report Share Posted January 18, 2014 Scenario - an IT company ABC Inc (S-Corp) with no real income or product as of the beginning of 2013. Some time in 2013 they found a company XYZ that agreed to put in a few hundred thousand into ABC company and if they develop a valuable program XYZ will be a 50% owner of that program if not XYZ will loss the money. So far sound like investment... At the end of the year it looks like the developed program is a good product and what they decided to do is to form a new LLC with 50% / 50 % ownership by ABC and XYZ. Now the newly formed LLC owns that developed program. Question - how do I classify a few hundred dollars that XYZ Inc gave ABC Inc? If I classify that as an investment I'd have to show that XYZ Inc is a 50% owner of ABC inc which is not a case If I classify that as a loan then later when the developed program ownership is passed to the newly formed LLC would have to be classified as a sale which is not a case either. It looks like the fact of transferring the program ownership to the LLC triggers a sale/income recognition instead of investment I'd like to get some input from the community how to better structure this transaction Thank you Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 18, 2014 Report Share Posted January 18, 2014 OK,you have me confused. Is it "a few hundred thousand" or is it "a few hundred dollars"? Quote Link to comment Share on other sites More sharing options...
jshtax Posted January 18, 2014 Report Share Posted January 18, 2014 Couldn't you just sell it for what they have in it to LLC for no gain and xyz has capital in new business? Trying to throw around ideas that might avoid a taxable issue. Debit cash credit loans 200k Debit asset credit cash 200k Debit cogs credit asset 200k Debit loan credit income 200k LLC Debit asset 200k credit partner 2 capital 200k Quote Link to comment Share on other sites More sharing options...
Vityaba Posted January 18, 2014 Author Report Share Posted January 18, 2014 kcjenkins - it's $XXX,XXX.00 Jshtax, the problem is that ABC Inc has been doing other things during the year and they never separated their expenses based on the related projects. But I like your idea of capitalizing expenditures instead of expensing them. I do not have any experience dealing with IT companies and capitalization rules application. Usually I dealt with construction company where developers would open a new company for each new project in which case it's easy - capitalize until completed and sold. It does not look that easy in this IT company case. Any recommendations where I can read more information about capitalization vs expensing, specifically related to the IT industry? As to the proposed entries, what would be a capital account of ABC Inc in the LLC? Zero? Quote Link to comment Share on other sites More sharing options...
jshtax Posted January 18, 2014 Report Share Posted January 18, 2014 Let me sleep on this. Just took some nyquil but will be more alert in morning. I like situations like this they allow for brainstorming. Quote Link to comment Share on other sites More sharing options...
Vityaba Posted January 18, 2014 Author Report Share Posted January 18, 2014 Thanks Quote Link to comment Share on other sites More sharing options...
jshtax Posted January 18, 2014 Report Share Posted January 18, 2014 In the mean time look up capitalization of software development cost. http://www.cbiz.com/page.asp?pid=10313 http://resources.mcgladrey.com/Proposed-regulations-released-clarifying-the-treatment-of-prototypes-in-determining-deductible?elq=00000000000000000000000000000000&elqCampaignId= Quote Link to comment Share on other sites More sharing options...
Vityaba Posted January 20, 2014 Author Report Share Posted January 20, 2014 I want to bring this up to see if anyone has any input Thank you Quote Link to comment Share on other sites More sharing options...
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