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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4438
Experience:  35 years tax experience, including four years at a Big 4 firm.
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TAX CONSEQUENCES FOR CHANGING FROM S CORP TO C CORP WITH ONE

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TAX CONSEQUENCES FOR CHANGING FROM S CORP TO C CORP WITH ONE SHAREHOLDER OWNING 100 PERCENT ALL ASSETS UTILIZING BONUS DEPRECIATION AND SHAREHOLDER HAVING 1.3 MILLION ON BOOKS AS NOTE TO HIM
Welcome to the site. I will be helping you today.

I did have some questions, though...

Basis for shareholder at conversion

At risk limitation for shareholder at conversion

Basis for depreciable assets, tax acc. depr. at conversion

Thanks. PDtax
Customer: replied 3 years ago.

Basis at conversion(stock & loan) 147,042 Shareholder has had substantial losses last 3 years


 


At risk limitation 147,042


 


Note payable to shareholder 1,627,615


 


Basis (tax) depr assets 75,871


 


Basis (tax) intangible assets 56,787

Hi Steve,

My answer assumes all the formalities of the loan, such as the executed note, a stated interest rate, etc. are all in place.

The at risk limitation is one of the three limitations to s corp loss passthroughs. Basis is first, then at risk, then passive. Your taxpayer has utilized almost all of his at risk limitation, now wants to convert to C.

The conversion does nothing to trigger any immediate tax consequences. The shareholder's basis in his loan to the corporation remains the same as his at risk limitation. The assets and accumulated depreciation methods remain the same.

Subsequent issues to consider would include future repayment of the shareholder loan. Any repayments in excess of 147,052 will be taxable to the shareholder as capital gain.

The assets continue to be depreciated as they have been.

Thanks for asking at Just Answer. Ask any follow up you like. If this answers your question, positive feedback is appreciated.
PDtax and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Although the shareholder is active, is the repayment of the loan of $147,042 still capital gains after excess is paid over the basis of $147,042?


 


Additionally the shareholder owns the building in a LLC (schedule E) and the S corp is accruing the rent liability of $244,000 on the corporate books as expense and set up a payable to the LLC which is recognizing the rental income each year for taxes. Does this add to the shareholders basis since the payable on the S books is actually to him ?


 


Thank You

Although the shareholder is active, is the repayment of the loan of $147,042 still capital gains after excess is paid over the basis of $147,042? Yes. The reason is the prior S corp losses were passed through to him, and used personally. That reduced his basis in the loan to the at risk limitation. Any repayments above the remaining at risk will be taxable as capital gains.


Additionally the shareholder owns the building in a LLC (schedule E) and the S corp is accruing the rent liability of $244,000 on the corporate books as expense and set up a payable to the LLC which is recognizing the rental income each year for taxes. Does this add to the shareholders basis since the payable on the S books is actually to him ?

Nice try, but no. The shareholder basis in the S corp and his loan to the S corp is not increased by accrued rent payable from the S corp.

Again, I assume that all entities, the S corp, LLC and taxpayer are all on the cash basis.

Thanks for asking at Just Answer.
Customer: replied 3 years ago.

No accrual basis for both

so the S corp and LLC are accrual basis, and the shareholder is on the tax basis?

the income or expense attributable to the shareholder (and his entities) is only reportable by the entity when the shareholder has to report the income. So, if the S corp owes rent to the shareholder, and accrues the expense on 12/31/x1, the shareholder does not report the rental income until paid in x2.

The same theory will hold for your scenario, since shareholder controls both entities. The accrual does nothing for shareholder until the rent is actually paid.

Thanks again.
PDtax and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

What would tax consequences be(if any) if taxpayer goes from C corp to LLC Partnership ? Same facts

I don't understand your question. Current structure is s corp and an LLC and the taxpayer, who owns 100% of both.

Please describe in more detail what you have in mind.
Customer: replied 3 years ago.


shareholder 100% of s corp, basis of $147 200 @ 12/31/12 and note receivable of uo1,700,000 .attorneys want to switch to LLC


 


partnership because of trust for the kids and


 


estate tax consequences

can you expand on your question a bit more?

what is the reason for switch from s corp?

is your question what would be the preferred entity for the s corp?

the other entity is to remain an LLC that owns the building?

Thanks.
Customer: replied 3 years ago.

THE S CORP IS TO BE CONVERTED TO A LLC PARTNERSHIP BECAUSE THE SHAREHOLDER WANTS HIS KIDS TRUST TO PARTICIPATE AS PARTNERS @ 40% OWNERSHIP

Again, more facts that might have been well suited to earlier disclosure. While my earlier answers hold, I would ask another question:

I would recommend that the kids' trust participate in the earning part of this arrangement. since you portray the s corp as a tax loser, what value does sharing the losses have? Having them participate in the long term growth of the real property, already owned in an LLC, makes more sense.

I know your question focused on the tax consequences of s corp conversion. Some family trusts can own s shares. You could even establish a qualifying trust if yours doesn't qualify, and avoid the conversion altogether.

Just a few suggestions. Please advise if I can assist any further.

PDtax