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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3000
Experience:  I've prepared all types of taxes since 1987.
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Hi Jon, have a client who has an LLC with two members being

Customer Question

Hi Jon, have a client who has an LLC with two members being taxed as a partnership. One member left the business on Dec 2011. The LLC has continued to operate with the one remaining member throughout 2012 to the present. The 2012 LLC return is on extension to 9.15.2013. The client also owns an S-Corp. Client has expressed interest in reporting the LLC income under the S-Corp. Since the LLC is now basically a single member LLC, can the S-Corp be allowed report the LLC income? Should the S-Corp make a resolution to acquire the assets of the LLC? Thanks for your help. Andrew in California
Submitted: 10 months ago.
Category: Tax
Expert:  jgordosea replied 10 months ago.

Greetings,

 

When the LLC that had been taxed as a partnership only had one member, that partnership was terminated. The partnership would have to file a final return as of the date that there was not more than one member.

 

As a single member LLC that entity is taxed as a disregarded entity. For an individual member that would be on Schedule C for services or selling goods.

 

An S corporation can be a member of an LLC. An S corporation that is a single member would report the activity as part of the S corporation return. This is treated as a branch or division of the corporation.

 

So, the S corporation can acquire the LLC membership from the shareholder either with a purchase or with a contribution from to capital by the shareholder.

Once the membership interest is transferred the LLC activity will be part of the S corporation tax return.

 

Since the corporation and the individual are distinct persons it is not proper to have the corporation report the LLC activity until it is the owner of the membership interest.

As for 2012, it may be necessary to consult an attorney in the client location to determine if such a purchase or transfer is valid under state law for a date in the past. My layman understanding is that, in general, such purchase or transfer can not be post dated or be effective for a past date.

 

Please ask if you need more discussion or clarification.

Thank you.

Customer: replied 10 months ago.

Hello Jgordos, thanks for the quick response. Let me give you more details here. The client runs a gas station through this LLC. He just recently purchased the land that the business sits on and plans to use the LLC to collect the rents from this property. He has in the past reported the gas station activity through this LLC and now he wants to report that same activity through his S-Corp. I was thinking perhaps a resolution to acquire this business entirely and not as an owner of a membership interest so that what we end up with is an LLC receiving rents only and the S-Corp receiving and reporting the gas station activity from now on. Thanks I really appreciate your help! My client is driving me bananas over this. Andrew

Expert:  jgordosea replied 10 months ago.

Hello again,

 

Certainly the S corporation can acquire the inventory and other assets from the LLC.

 

Since the corporation and the client are presumably related parties (50% or more of the stock is owned directly or indirectly by that individual.

So, the individual can not deduct a loss on the sale.

 

As mentioned, either these assets can be contributed to the corporation or bought at fair market price by the corporation. If the corporation has cash a purchase would allow transfer out. If the corporation does not have cash (and cash flow is not likely to be sufficient in the near future) then a contribution of capital is likely the better course.

 

There is a potential trap due to the self rental rules. So it may be best to minimize net income for the rental activity. A net rental loss will be subject to the normal passive activity loss rules - See more at: http://www.ccim.com/cire-magazine/articles/139452/2012/01/self-rental-rule#sthash.WogrHUDU.dpuf

 

Hope this clarifies for you; but please do ask if you want more help.

Best wishes.

Customer: replied 10 months ago.

Hello J, ok now it's becoming much clearer. For the record the corp and the client are related parties. So if the corporation receives the business assets as a capital contribution then I still should have resolutions on record for both the LLC and the S-Corp of the transfer. Then from that date of transfer the corporation will then report the activity. is this correct? Thank you again for your time.

Expert:  jgordosea replied 10 months ago.

You are quite welcome.

 

You have it correct, yes.

 

If you want me to assist in the future please put my name in the question so other experts can give me the chance to respond.

 

Thank you for the opportunity to be of service.

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3000
Experience: I've prepared all types of taxes since 1987.
jgordosea and other Tax Specialists are ready to help you
Customer: replied 10 months ago.

Jgordosea, quick question. If I convert an LLC to a corp midyear, am I still required to file an final LLC return to IRS? I know I need to file a form 1120 from the date of conversion to end of tax year but wasn't sure about the LLC. Thanks in advance, Andrew.

Expert:  jgordosea replied 10 months ago.
Hello again,

There will not be a separate return for the first part of the year if a single member LLC elects to be taxed as a corporation during the year.
There would be the first part of the year reported on the individual 1040 Schedule C (or Schedule E for rental, F for farming, etc). So, just a schedule on the 1040 for disregarded entity and no other return needed.

You also may want to consider electing small corporation status to avoid double taxation of profit and use 1120-S to pass through to the shareholders. Without S status the C corporation will pay tax on net profit and the shareholders will also pay tax on dividends.

Multimember LLC will always need a final return up to the time that the partnership is deemed to be terminated.

Please ask if you need more discussion or clarification on this question.

Thank you.



Customer: replied 10 months ago.

Hello Jgordosea, thanks for clarifying that. Ok one more question: Client had a business and was renting the property location. There arose a dispute in the agreement with the landlord and the business owner was forced to move out his business, basically closing it all down. He had invested $350,000. to get it going but now any attempt to recoup those monies are lost. My research tells me it may be an involuntary conversion but not sure if it would be treated as an ordinary loss or a capital loss. The business was never sold or traded just that the monies used to start this business are gone so I'm favoring an ordinary loss not subject to the $3,000. capital loss limitations. Thanks again in advance for your thoughts. Andrew

Expert:  jgordosea replied 10 months ago.

Hello Andrew,

 

Although I do want to answer any and all questions, the site rules are that each new question is to be in a separate thread, sorry.

 

Can you please redo this different question as a new question?

 

You can use this link that will give the question only to me (for a short time period and then it will appear as to anyone) at http://www.justanswer.com/finance/expert-gordosea/

 

Or you can put my name in the question so other experts can see you want me to respond.

 

Thank you for the opportunity to be of service.

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