Client in middle of year went to an LLC - 1120S. He did not transfer any of his assets over to the 1120S but is paying the liabilities out of the 1120S

All of the assets are depreciated out from the sole propr. So with no assets to move over only the liabilities - do you transfer them to the LLC? If so - how do you handle the debit of it on the balance sheet? The expense was written off the schedule C so now just have payments.

Also - do you have to take a distribution from the LLC - he does have a good profit but he did not take any money out but only a big check at the end of the year so it was payroll. So do you take both payroll and a distribution?

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You need a specific date to end the sched c and start the 1120s. It sounds to me like everything is mixed up, like a toss salad.

You would file a short year Sched C from the beginning of the year to the cut off date and a short year 1120S from the cut off date to 12/31.

After p/r, if there is a credit balance in the AAA acct, you can take a non taxable distribution.

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This is fascinating. You say your client "went from one entity to another." How did he do that?

Did your client file a document to register his LLC with the state? Did your client file Form 2553? Did his LLC file Form 2553?

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>>The expense was written off the schedule C<<

If he did not transfer the depreciable assets to the corporation when he closed out the Schedule C, he will need to recapture Section 179 and MACRS.

I hope he doesn't think he has isolated his liabilities behind the corporate shield while keeping all the assets for himself, because it don't work that way.

As long as he takes a reasonable wage, he can also have additional distributions.

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If only the debt is to be transferred to the 1120S-LLC entity, the transfer would not qualify as a tax-free exchange for stock. The liability is treated as a cash equivalent or boot and is taxable to the individual.

For the transfer to qualify as a tax-free exchange for stock, the assets must be transferred at a value greater than the liabilities. I expect you will want to correct the books to show the asset transfer.

Yes an LLC electing S-corp is considered to have stock even tho it is not actually issued.

The assets transfer should be at fair-market-value and recorded on the books as such. However, the depreciation or tax basis of the assets would be the same tax basis as was in the hands of the individual that transferred the asset.

If the 1120S-LLC later sells or transfers the assets back to the individual it would be at a taxable gain for the full amount realized (or the fair-market value for transfer back to the individual).

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