Asset Depreciation Basis

[ConnorandCo]

A LLC taxed as a partnership has recently filed conversion papers with the NC Sect. of state to incorporate. The corporation did receive a new EIN. The LLC had assets worth 500k, and had been depreciated down to 250k. The conversion was done on 12.1.15. Hypothetically, if the FMV of the assets was still 500k, could the newly formed incorporation reset the value of the assets to the FMV for the corporation to depreciate? I was more under the thought process that the basis of the assets would stay the same upon conversion?

[DaveinTexas]

A few ways to get this done

A partnership or LLC can be incorporated three different ways:
(1) a transfer of assets and liabilities from the partnership or LLC to the corporation in exchange for corporate stock and any other consideration, followed by the liquidation of the partnership
(2) a distribution of partnership or LLC assets and liabilities to its partners or members, who then transfer the assets and liabilities to the corporation in exchange for stock and other consideration; or
(3) the contribution by the partners or members of their partnership or LLC interests to the corporation in exchange for corporate stock and other consideration.

Here is another way to describe these methods:
(1) Assets-Over" conversion. The LLC transfers its assets and liabilities "over" to the new corporation, the corporation issues its stock to the LLC, the LLC transfers the stock to its owners in proportion to their LLC capital interests, then the LLC dissolves.

(2) "Assets-Up" conversion. The LLC distributes its assets and transfers it liabilities "down" to its owners in proportion to their capital interests, the LLC dissolves, and then the owners transfer their individual share of received assets and liabilities "up" to the new corporation in return for a proportionate share of its stock.

(3) "Interests-Over" conversion. The LLC owners transfer their LLC capital interests "over" to the new corporation in return for a proportionate amount of corporate stock, and then the LLC dissolves.

It seems to me that a PLAN of action must be in place before this blessed event occurs; the decision shouldn't be made after the fact but I am no expert on these matters.

Also remember, if the liabilities of the Partnership exceed the basis of the assets transferred, the owners will realize gain upon the transfer (reported on the final Partnership Return). The basis of the assets to use is determined by the method of the conversion the partners decide upon.

Some light (joking) but helpful reading would be Revenue Ruling 84-111. I pulled the rest from Google and a bit of past experience on these matters.