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I have a client that has owns a building, it is an LLC with…

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I have a client that...
I have a client that has owns a building, it is an LLC with 2 members. When the LLC was forms it was elected to be filed as an Scorp. We want to terminate the S election and revert back to a partnership for 2015. We will write a letter to the IRS to terminate the election as well as fill out a new 8832 and attach it to the partnership return. Do you see anything that can cause an issue with this?
Submitted: 2 years ago.Category: Tax
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2/22/2016
Tax Professional: Jonathan Tierney, Certified Public Accountant (CPA) replied 2 years ago
Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 323
Experience: Tax Accountant at Praxair, Inc.
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Hi, my name is ***** ***** I can help. I just want to clarify some things. What was the date (or approximate date) the S election was made? Are you planning on terminating the S election retroactively?

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Customer reply replied 2 years ago
IT was more than 5 years ago. 2006Yes, terminating for tax year 2015.
Tax Professional: Jonathan Tierney, Certified Public Accountant (CPA) replied 2 years ago

The problem with converting a S corporation to partnership is that are the assets of the corporation must be distributed out of the corp with the fair market value as their basis and any gain (but not loss) that results must be recognized by the S corp on its distribution.

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Tax Professional: Jonathan Tierney, Certified Public Accountant (CPA) replied 2 years ago

To revoke a S election, the corporation must follow the procedures under IRC 1362, found here:https://www.law.cornell.edu/uscode/text/26/1362, although the S election can be terminated automatically if it ceases to qualify as a S corporation (such as making a nonresident alien a shareholder). However, if the S election terminates automatically, the LLC does not revert back to a partnership, but rather becomes a C corporation.

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Tax Professional: Jonathan Tierney, Certified Public Accountant (CPA) replied 2 years ago

Under IRC 1362 a S election must be terminated by:

(i)

a revocation made during the taxable year and on or before the 15th day of the 3d month thereof shall be effective on the 1st day of such taxable year, and

(ii)

a revocation made during the taxable year but after such 15th day shall be effective on the 1st day of the following taxable year.

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Tax Professional: Jonathan Tierney, Certified Public Accountant (CPA) replied 2 years ago

The steps to terminate the S election can be found here: http://info.legalzoom.com/terminate-scorp-election-revert-llc-23367.html

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Customer reply replied 2 years ago
This is an LLC, it is just an S corp for tax purposes, it is not a true S corpI had pulled up the same step on Legal Zoom prior to this, that is why I brought up the letter and the 8832. I was wondering if there was anything else.Im lost, filing the 8832 would tell the IRS we want to be treated as a partnership, so we do not have to worry about the C corp. Since this is an LLC it could not go to a C corp, in actuality it would automatically revert to an LLC partnership or a disregarded entity it a single person.Not sure what you mean here, this should not apply to an S corp termination of an LLCThe problem with converting a S corporation to partnership is that are the assets of the corporation must be distributed out of the corp with the fair market value as their basis and any gain (but not loss) that results must be recognized by the S corp on its distribution.This is not a true S corporation if I was Terminating the S corp and setting up a different entity then this would apply.So back to my original question. Anything else that needs to be done to terminate the S election of an LLC besides the 8832 and the IRS letter with all the members signatures
Tax Professional: Jonathan Tierney, Certified Public Accountant (CPA) replied 2 years ago

No, nothing else needs to be done, but a final S corporation return needs to be filed. You should read IRS Publication 3402, Taxation of Limited Liability Companies, page 4, first column, found here https://www.irs.gov/pub/irs-pdf/p3402.pdf regarding the effect of changing an LLC's tax classification from S corporation to partnership.

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