Sole Proprietor creates LLC

[S T]

Taxpayer starts a business late 2003 (those expenses become startup), actually open for business in early 2004, then about 6/04 creates an LLC (2 member).

Question, so do I file Schedule C for sole proprietorship 1/04 - 5/04, then file 1065 for the LLC 6/04 - 12/04?

Taxpayer closes business in 1/05, but didn't file the LLC papers until 6/05 for closing, and also at the end of of 12/04 taxpayer has $5,000 of inventory.

What happens to the inventory on hand 12/04?

Question, do I file LLC form 1065 as first and final in 12/04 or keep open and file the final in 2005, based on LLC closing date with Secretary of State (NV)

If I file the final in either year and inventory not sold in 2005, but at a later date, how do I report sale of inventory? What happens if the taxpayer never disposes of the inventory , or is it possible that the taxpayer donate the inventory and take a charitable deduction?

Sandy

[Armando Beaujolais]

"Taxpayer starts a business late 2003 (those expenses become startup), actually open for business in early 2004, then about 6/04 creates an LLC (2 member).

"Question, so do I file Schedule C for sole proprietorship 1/04 - 5/04, then file 1065 for the LLC 6/04 - 12/04?"

Yes. You also have the issue of partners' beginning basis, how the Schedule C assets were transferred to the partnership. You'll then have the issue of distributing assets back out of the partnership when it's terminated.

"What happens to the inventory on hand 12/04?"

Good question. What happened to the inventory on 12/04? If partnership operations were discontinued, I'd say at that point the inventory was distributed to the partners.

"Question, do I file LLC form 1065 as first and final in 12/04 or keep open and file the final in 2005, based on LLC closing date with Secretary of State (NV)?"

What's the "closing date?" If it's an arbitrary date to close the account with the state, don't go by that. If the "closing date" date refers to the date the LLC was terminated, use that date.

"If I file the final in either year and inventory not sold in 2005, but at a later date, how do I report sale of inventory?"

Are you talking about the inventory being sold out of the LLC? Wait a minute. I thought the LLC terminated. Now I'm confused.

The general rule with partnership returns is that Form 1065 is not required if there is no income and no expenses for the year. However, an LLC is required to file Form 1065 if it's taxed as a partnership regardless of whether there's income or expenses.

It seems the real question is whether and when the LLC terminated. If the LLC is still holding inventory for potential sale, it's still in existence. If the inventory has been distributed to the LLC members, the LLC has terminated and then it's back to Scheudule C.