Discussion:LLC Transfer to S Corp- Depreciation
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Discussion Forum Index --> Basic Tax Questions --> LLC Transfer to S Corp- Depreciation
Discussion Forum Index --> Tax Questions --> LLC Transfer to S Corp- Depreciation
FloridaTaxes (talk|edits) said: | 1 September 2009 |
| A have a client who currently has a 2 member LLC. As of 10/1, they are going to officially transfer the LLC into an S Corp with the state of Florida. They are showing a profit YTD but will spend money in the next few months that will probably end their year with a very small profit or even a small loss for the full year. They have some assets worth around $3,000 that were acquired new in January of 2009. My question is- do those assets get depreciated on the 1065 for the LLC or the 1120s for the S Corp or both? There are no other assets that have not been fully depreciated. Can they still get the 179 deduction?
Since the LLC pays SE tax it would be to their advantage to take the depreciation on the LLC's books, not the S Corp's. Since the LLC will cease to exist on 10/1, I am assuming they need to file a short year return for the LLC. Is this correct? Any help would be greatly appreciated. | |
| 1 September 2009 | |
| 1120S because the LLC would have placed the assets into service as well as disposed of them in the same year.
LLC - yes - short year - watch for the due date. | |
Harry Boscoe (talk|edits) said: | 1 September 2009 |
| FLTaxes, when you say "they are going to officially transfer the LLC into an S Corp" do you mean that the members of the LLC are going to contribute their membership interests in the LLC to a newly-formed S corporation in exchange for its stock? Or what? | |
FloridaTaxes (talk|edits) said: | 1 September 2009 |
| In Florida, you can take an LLC and transfer into a Corporation, instead of just starting a new company. If you have been in business for a while and do not want vendors and customers thinking your company is new, this is helpful because the history can be traced. It also dissolves the LLC and forms the Corporation in one step. | |
| 1 September 2009 | |
| Depreciation is claimed on both returns. See IRC Sec. 168(i)(7) and Prop Reg § 1.168-5(b)(4). | |
FloridaTaxes (talk|edits) said: | 1 September 2009 |
| Kevin- does this mean no Sec 179 is allowed because the assets were not technically purchased by the S Corp? | |
| September 1, 2009 | |
| You have to allocate between the old LLC return and the new 1120S. Given the amounts tho', I think you're ok Sec 179'ing them in the LLC. | |
| 1 September 2009 | |
| Florida, for purposed of Sec. 179 there is no purchase here since the property was acquired in a Sec. 351 transaction. §§ 179(d)(2)(C)(i) and 179(d)(2)(A). | |
| September 1, 2009 | |
| And perhaps I should clarify. You don't re-179 them. This is a 351 transfer like any other, so the old balance sheet becomes the new except for changes in the equity section. But you can take the 179 originally on the 1065, they'll then roll over at cost and fully depreciation onto the new. You must continue on, you don't start over. | |
| 1 September 2009 | |
| I have similar situation. Client was single member LLC (filing on sch C). In 2008 became a S-corp effective 1/1/08 (still a LLC at state level). I am trying to figure out the equity section. They use Quickbooks and same Quickbooks file as when filing as a schedule C. So the equity shows retained earnings from all prior years, all draws, and all prior contributions. I'm thinking the equity section should just contain some amount allocated to stock (say $1,000) and the difference should be the amount of their contribution under section 351 plus and new contributions or minus any distributions for 2008. Is my thinking correct, that the equity sections start over even though it is the same company because it is filing now as an s-corp? | |
Harry Boscoe (talk|edits) said: | 1 September 2009 |
| "In Florida, you can take an LLC and transfer into a Corporation, instead of just starting a new company."
And how is that transaction treated for income tax purposes? | |
FloridaTaxes (talk|edits) said: | 1 September 2009 |
| For tax purposes I believe you are transferring the LLC's property into the S Corp in exchange for stock. LLC files a final return and S Corp begins filing 1120S. So yes, for tax purposes, you are ending the LLC and starting a new corporation. It's just a shorter way in FL to accomplish this and gives the owners peace of mind knowing they can still say they've been in business for 10 years, primarily when dealing with vendors and creditors. | |
Harry Boscoe (talk|edits) said: | 1 September 2009 |
| If the LLC exchanges its property - its business assets, I guess - for the stock of the S corporation, the S corporation will lose its election as an S corporation since an LLC is not allowed as an S corporation shareholder. The income tax rules don't have to accommodate Florida's LLC/S corp transaction, it's the other way 'round. This is sort of why I asked how the transaction is treated. Hope you don't mind my comments. | |
FloridaTaxes (talk|edits) said: | 1 September 2009 |
| Yes, Florida has its own way of doing pretty much everything. So I guess I would have to liquidate the LLC's assets, distribute them to the 2 partners, and then have them contribute the assets to the S Corp under a section 351 exchange? | |
FloridaTaxes (talk|edits) said: | 1 September 2009 |
| And I think my wording was confusing, I never intended for the LLC to become a shareholder in the corporation. | |
| September 1, 2009 | |
| As to Mr. or Ms. Russell (not a big profile policer here!), yes, the equity merely becomes the net worth on the BS, $1000 or what have you to Capital Stock and the balance to Add'l Paid In Capital. | |
Harry Boscoe (talk|edits) said: | 1 September 2009 |
| Or maybe it would be better if the members of the LLC were to contribute their interests in the LLC to the S corporation in exchange for the corporation's stock. That would seem to avoid the "liquidation" of something, which is always a source of problems for me. | |
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