CHANGING from a Sch C - LLC - to a S corp

[WITAXLADY]

I have always "sold" the assets when changing entities...

WI LLC single member filing as a Sch C now doing payroll and filing as a S corp so the assets need to be moved.

Is this correct? Can it be done this way? Is there a better way?

Had a CPA question me on it as the S Corp started Jan 1 and therefore no Sch C depreciation but the Sch C did not dissolve in the prior year - not until the S corp started in the new year was there a change or sale....

I need to be able to answer the CPA please.

Comments, advice?

Thank you,

D

[kcjenkins]

Dee, I think you and your client have to decide, not the CPA, whether the Sch C ended 12/31 and the new Corp started 1/1, which would be my choice, or if it ended on 1/1, which would mean a lot of extra reporting for one day. And since that would be a zero income day, what's the point?

I'm not clear why you have to explain anything to the CPA, but if you do, think about this. A business starts when it is open for business, and it ends when it stops being 'open for business'. So the Sch C ended 12/31, regardless of when they sold the assets. How often have you seen a business close, but not sell the assets for a month or more? And I've seen a business sell off some of their assets before closing, too. Hope this helps.

[Lion EA]

Also, and this is overly simplified, for the same ownership, moving DOWN the entity chain means "selling" or distributing the assets as the entity closes. But, to move UP the entity chain, SMLLC to one-shareholder S-corp for instance , can't the assets be contributed in a tax-free transaction with the new entity picking up where the old left off?

(I've done something similar only once years ago, a partnership went to an S-corp, with their lawyer's help and a CPA on the lawyer's staff advising me.)

[WITAXLADY]

the ? comes into play as to how to treat the assets of the Sch C and getting them into the S Corp -

Wouldn't they have to be sold and purchased? Hopefully for the amount of $$'s left on depreciation for a $0 transaction?

What happens tho' by doing it thru the Sch C - you get 1/2 depreciation as loss on the Sch C and the value of the assets are then less for the S corp - sort of all comes out in the wash...

He says use a 351 election.

How would you actually show a tax-free transaction? What forms, etc on the 1040?

Thx D

[imjulier]

Yes, 351 election is how you do this. Its not a sale/purchase because its a tax-free transfer of assets....which is not a sale. I'd convert to personal use on the Sch C and put in the S corp at book value. When I did this years ago, it required an explanation be attached to both returns.

[OldJack]

Well... to meet the requirements of a tax free transaction the assets are supposed to be transferred to the S-corp at FMV in exchange for the shares of stock (Debit Assets / Credit Stock). This does not mean that depreciation basis changes, rather it continues as before, but that the excess of FMV in excess of depreciation basis is a non-depreciable asset.

Nothing is required to be shown on the 1040 for the transaction, however, you could show a disposition/withdrawal of assets on form 4797 at no gain/loss just to document.

[Gail in Virginia]

Well... to meet the requirements of a tax free transaction the assets are supposed to be transferred to the S-corp at FMV in exchange for the shares of stock (Debit Assets / Credit Stock). This does not mean that depreciation basis changes, rather it continues as before, but that the excess of FMV in excess of depreciation basis is a non-depreciable asset.

Nothing is required to be shown on the 1040 for the transaction, however, you could show a disposition/withdrawal of assets on form 4797 at no gain/loss just to document.

Does this result in your basis in the corporation potentially being greater than your basis in the assets placed in the corporation? Or less? Been a long time since I studied this.

[OldJack]

Does this result in your basis in the corporation potentially being greater than your basis in the assets placed in the corporation? Or less? Been a long time since I studied this.

You will have an inside basis (corp) and an outside basis (personal).

[WITAXLADY]

I think I like my way better - makes sense -

deals with the closing of the business

deals with the sale of the assets

been doing for 10 years

clean and neat

gives basis for new S Corp

no double numbers - ie basis

simple transaction

Besides how do you get the assets out of the Sch C? if you do not have a sale in 2013?

Thx D

[jklcpa]

Besides how do you get the assets out of the Sch C? if you do not have a sale in 2013?

Thx D

There is no sale. You tell your tax program that the assets were converted to personal use. Then the person transfers them to the S corp and records them as Old Jack described. The S corp will continue on to depreciate them as if they hadn't changed entities using the carryover basis. In the S corp return, it will show the original depreciable basis and the accumulated depreciation from the Sch C as the opening numbers and depreciate from there. The excess of FMV over the adjusted basis on the date of transfer is nondepreciable.

[OldJack]

I think I like my way better - makes sense -

deals with the closing of the business

deals with the sale of the assets

been doing for 10 years

clean and neat

gives basis for new S Corp

no double numbers - ie basis

simple transaction

Besides how do you get the assets out of the Sch C? if you do not have a sale in 2013?

Thx D

The "anti-churn" rules do NOT allow you to create a new/higher tax basis from a sale of assets to a related entity. You must have been doing it wrong for 10 years if you have been depreciating a new basis (other than a carryover tax basis). Also a "sale" would mean you have to recognize a tax on gain at FMV as the transaction would not qualify as a tax free exchange for stock.

[WITAXLADY]

I get the doing it wrong part Sold it for -0- and no gain...

started in S Corp at ending basis of Sch C

But year of sale - depreciation is 1/2 so compensated for that with Sch C loss and less value of capital vs personal as -0- and same value of assets

Same $$$ amount

Wouldn't it be more correct to be treating it as a sale and taking 1/2 depreciation?

Thx

[kcjenkins]

No, you did not sell it, you contributed it in exchange for stock, at book.

[WITAXLADY]

BY George I think I (may have) got it...

you mentioned stock value of $100 or $1 per stock - will this have bearing?

If the assets are basis of $1000 or $10,000 - does that make a difference or is this now capital contributed?

I really did take 2 classes on S corps...

D

[kcjenkins]

Assets contributed are entered at their book value, not FMV, on the fixed assets schedule. For the books, you enter at FMV. This might be more or less than BV of the contributor, but does not affect depreciation. If you contribute $10,000 FMV and you set par at $1.00 you would issue 10,000 shares, but if you set par at $100 you'd issue 1000 shares. And yes, this is 'contributed capital'.

Edited May 30, 2014 by kcjenkins
to make clearer what I'm saying

[OldJack]

Assets contributed are entered at their book value, not FMV. if you contribute $10,000 and you set par at $1.00 you would issue 10,000 shares, bit if you set par at $100 you'd issue 1000 shares. And yes, this iss 'contributed capital'.

I agree that book value is tax basis, but disagree with using book value for stock value recorded on the corporation books as it is a standard accounting method to record the stock value at FMV. Most of your web research only talks about tax basis and therefore does not address the recording on the corporate books. FMV booking is especially needed where you have two 50-50 owners when one shareholder contributes cash and the other contributes property of equal value. Here is a quote on how one accounting textbook states for recording stock value on the corporation books:

>>-----

McGraw-Hill

Noncash Acquisitions

Companies sometimes acquire assets without paying cash but instead by issuing debt or equity securities, receiving donated assets, or exchanging other assets. The controlling principle in each of these situations is that in any noncash transaction (not just those dealing with property, plant, and equipment and intangible assets), the components of the transaction are recorded at their fair values. The first indicator of fair value is the fair value of the assets, debt, or equity securities given. Sometimes the fair value of the assets received is used when their fair value is more clearly evident than the fair value of the assets given.

<<

[kcjenkins]

AGREED, JACK, I REALIZED I WAS NOT CLEAR, AND EDITED MY ANSWER ACCORDINGLY.