Schedule C to S Corp

[Andrea M]

If a Schedule C client converts his business to an Scorp, how do you calculate starting basis?

 

 

[Abby Normal]

It's carryover basis.

[Richcpaman]

The basic answer is carryover basis, but did you get all the other steps done for the conversion?

Rich

 

[Andrea M]

Thanks for the responses.

I must admit that I'm over my head with this client and I'm trying to figure out how to transition them to another, more knowledgeable, tax provider. I need to stick with Individual returns.

 

 

[RitaB]

Andrea, if you want to keep this client when he's an S-Corp, there's no time like the present to get good at something new.  We are all terrible at things until we are good at them.  You can do it.  Heck, I think half of my job as an adult is to Google things.  We are here for you, too.  And good ole IRS publications and instructions are invaluable.  They act like they hate you at first, but it's an act to see if you'll hang in there. 

[Lion EA]

And, starting with them now, you know where they came from, where the numbers are coming from.

[Andrea M]

Thanks Rita. I just feel like I've made some mistakes with this and it worries me. I really should buckle down and commit to getting better at it; I guess by saying I'm giving up I'm trying to take the easier way out  

I think that I'm going to use the ending equity of the Sole Proprietor as the beginning basis. There were no prior calculations of basis, so just saying 'use carryover basis' won't work or it will require a lot of forensic work to figure it out.

Thanks

[Abby Normal]

The carryover basis just refers to the fixed assets. You just keep the same depreciation schedule. Cash, inventory and any other assets also come over just as they are in the Sch C, as do all the liabilities. So, yes the ending Sch C equity is the beginning stock basis for the S corp. I would show it as Capital Contributions (line 2) on the ATX Shareholder's Basis Statement.

ATX does a pretty good job of tracking shareholder stock basis. My one complaint is that when there are suspended losses due to lack of basis, it doesn't keep a detail list of what the suspended losses are made of (ordinary loss, Sec 179, charitable contributions, etc.). It just gives you one lump figure. It does keep a detailed list in the 1040, and since you're doing the 1040, it will be fine.

I complained to ATX about the lack of detail in the 1120S (and 1065) basis worksheets and they told me I don't need it. I assured them that I do because suppose I'm doing the 1120S but one of the shareholders uses another preparer for the 1040. They need the detail.

The main things you need to know is that basis can NEVER go below zero. Distributions in excess of basis are taxable as capital gains. ATX defaults them to short-term but after the first year they're long-term.

And if distributions are not all allowed in AAA (M-2), you will have differences between AAA and retained earnings. 90% of my S corps have these differences. AAA is meaningless as best I can tell. I've never needed it for anything. Basis, however, is extremely important.

[Andrea M]

34 minutes ago, Abby Normal said:

The carryover basis just refers to the fixed assets. You just keep the same depreciation schedule. Cash, inventory and any other assets also come over just as they are in the Sch C, as do all the liabilities. So, yes the ending Sch C equity is the beginning stock basis for the S corp. I would show it as Capital Contributions (line 2) on the ATX Shareholder's Basis Statement.

^^Thank you for the detailed response. I'm able to calculate the current year ins and outs, just wobbly regarding the beginning #.

In the above, there seems to be a conflict in saying the 'carryover basis equals fixed assets' and then saying 'equity is the carryover basis'.

 

[jklcpa]

1 hour ago, Andrea M said:

^^Thank you for the detailed response. I'm able to calculate the current year ins and outs, just wobbly regarding the beginning #.

In the above, there seems to be a conflict in saying the 'carryover basis equals fixed assets' and then saying 'equity is the carryover basis'.

 

When he said carryover basis, it means that whatever those balances are on the books of the Sch C on the date of transfer come over exactly at those same values without adjustment to market value. If the Sch C was a full calendar year and the S Corp began on Jan 1 of the next, the fixed assets would transfer in to the S corp at their cost basis and accumulated depreciation would also transfer in at the value on 12/31. 

If the transfer happens part way through a calendar year, the depreciation isn't calculated as 2 short periods. You would have to calculate the full year as if it was one ongoing entity and split the full year depreciation expense for the year of the transfer into its 2 periods. Start with accum deprec at beginning of the Sch C's year and add the depreciation expense for that part of the year that the Sch C would report and add that in to get the accumulated depreciation at the date of incorporation. Then, on the S corp books, recognize the rest of the depreciation expense that relates to the remainder of the year.  You might have to enter those periods' depreciation expense manually as overrides to get your program to report the correct expense, depending on what program you are using.  In the S corp's first full year, your program should then be able to handle the calculations without overriding.

[Abby Normal]

54 minutes ago, jklcpa said:

You would have to calculate the full year as if it was one ongoing entity and split the full year depreciation expense for the year of the transfer into its 2 periods

Otherwise known as a PITA.

[RitaB]

1 hour ago, Abby Normal said:

Otherwise known as a PITA.

There's a picture in the dictionary, in fact.

[Andrea M]

The balance sheet has been set-up in the new company with the ending balances from the Schedule C. I'm okay there.

My specific concern was the starting carryover # when preparing the Shareholder Basis Sheet, in order to keep track of the changing/fluctuating basis each year.

Thank for all the responses. Sorry if my posts are confusing... 

[OldJack]

Will, I agree and disagree with the carryover basis.  For depreciation purposes and the shareholder's individual basis it is carryover basis.  But for the corporation stock issue value and S-Corp book basis it is the market value at time of the asset contributed in exchange for the stock.  For example shareholder A contributes equipment (carryover basis $200) with a market value of $5,000 for 5000 shares of stock and shareholder B contributes cash of $5,000 for 5000 shares.  The Corporate books show depreciable equipment cost $200, non-depreciable equipment cost $4,800 (think like land), cash $5,000 and capital stock issued $10,000.  If the S-Corp was to short-term sell the equipment for $5,300 it would pass thru a $300 taxable gain and the shareholder would have a $100 taxable gain on his 1040.

[OldJack]

On ‎6‎/‎14‎/‎2016 at 9:42 AM, Abby Normal said:

>>The carryover basis just refers to the fixed assets. You just keep the same depreciation schedule. Cash, inventory and any other assets also come over just as they are in the Sch C, as do all the liabilities. <<

Remember, if liabilities assumed by the S-Corp exceeds the transferor's adjusted basis in the asset the transferor has a gain recognized to the extent of the excess (code sec. 357(c)(1)).

>>The main things you need to know is that basis can NEVER go below zero. Distributions in excess of basis are taxable as capital gains. ATX defaults them to short-term but after the first year they're long-term.<<

Remember, basis can never go below zero for the shareholder deduction of loses, not to be confused with the equity or AAA account of the S-Corp.  All losses pass thru to the shareholder(s) regardless of S-Corp basis and loss limitation is considered at the shareholder tax return.

 

 

[OldJack]

I am really surprised that no one challenged me on my S-Corp example of the sale of the asset.  The $300 gain is the S-Corp book gain and not the tax gain.  When the S-Corp reports the sale on form 4797 it shows sale price of $5,300 and tax basis of $200 with a gain of $5,100 passed through to the shareholder.  The shareholder has zero basis in the asset and is taxed on the full $5,100 since his $200 basis is now the basis of his shares of stock and not the asset he contributed and was sold by the S-Corp.  The difference in the $300 book gain and $5,100 tax gain on the S-Corp 1120s is accounted for as an adjustment on Sch-M1 of the 1120s.

[Michele K]

I spoke with an attorney about this very matter.  He stated it was not a good idea for two reasons, 1 being legal liability that the sole prop ein was attached to your schedule c and ssn, two the IRS would not recognize the termination of the schedule c.  In other words they would always be looking for a schedule c on my 1040.  Being a tax accountant, he suggested I get a new ein and efin in order to decouple my schedule c business from my new s corp business.  

It didn't state in the original thread if the client was starting a new s corp and getting a new ein or just filing as an s as opposed to a schedule c.  I assumed the latter.