Beginning balance sheet for ongoing SMLLC business converting to S Corp

[David]

SMLLC business began operating in 2018 and was approved to file as a S Corp effective 1/1/19.

I would think that the beginning balance sheet for Form 1120S should be the company's ending balance sheet as of 12/31/18 since the company was operating prior to being approved to be taxed as a S Corp. Is this correct?

Thanks.

 

[ILLMAS]

I would say yes, if the disregarded entity maintained a balance sheet, but could you start with 2018 balances as zero and end 2019 with the correct amounts.  

[grandmabee]

I would go with zero because it is the marked as first return on the 1120S

 

[jklcpa]

David, you are on the right track. The LLC is a disregarded entity and so this is treated as a sec 351 transfer where assets and liabilities are exhanged for the corporate stock. You will need to determine the ending balance sheet at 12/31/18 to do that.

This article from The Tax Advisor explains the process more fully, and has cites if you want them:

 https://www.thetaxadviser.com/issues/2013/dec/casestudy-dec2013.html

[David]

Thanks, everyone for your help.

Judy, if I understand you correctly, you are in agreement with the others that the 1120S will show no beginning balance on the balance sheet? However, the equity balance for the 12/31/18 SMLLC balance sheet will be the contributed capital amount in 2019?

Is this correct?

Thanks.

 

[Lee B]

That's not what Judy is saying. The way that you started your original post is correct.

You contribute assets in exchange for stock, so the assets that you contribute are recorded on the S Corp Balance Sheet.

One issue that can be a tax trap for the unwary is if the S Corp assumes liabilities in excess of the assets value, taxable gain can be triggered.

[David]

Okay, I must have misread what was being said. I understand that the SMLLC member is exchanging assets and liabilities for corporate stock. However, isn't this considered exchanged as of 1/1/19, therefore there is no beginning balance sheet for the 1120S? 

Since there is no beginning balance sheet then isn't the net of the assets less liabilities, as of 12/31/18 in the SMLLC balance sheet, considered capital contributed to the S Corp as of 1/1/19?

Or is the company considered to be continuing on and just electing to be taxed as a S Corp. Therefore, continue with the 2018 balance sheet except, instead of member capital, the equity will be considered Paid in Capital?

Thanks for your help.

 

 

 

[Lee B]

3 hours ago, David said:

 

Or is the company considered to be continuing on and just electing to be taxed as a S Corp. Therefore, continue with the 2018 balance sheet except, instead of member capital, the equity will be considered Paid in Capital?

Thanks for your help.

 

 

 

David, basically this is correct. However, you should read the article referenced in Judy's post.

Also, you need to make sure all of the assets were transferred to the S Corp, some assets may have been held back by the owner.

[David]

Thanks for your help with this.

I did read the article, several times. My last post was based on what I read. If that isn't 100% correct then I must still be missing something.

Liabilities don't excess assets as of 12/31/18 for the SMLLC business. Also, all assets were transferred to the S Corp.

If my last post isn't entirely correct then what part is not correct? 

Thanks.

[David]

I meant to say "Liabilities don't exceed assets..."