Sole Proprietor to S Corp

[Brian EA]

Client was a sole proprietor for the first 4 months of the year. In May, he incorporated his business. How is the inventory handled at the end of April; do I have to attach a statement explaining the movement of the inventory or just show it as the beginning inventory?
Thanks

Brian

[kathyc2]

Client was a sole proprietor for the first 4 months of the year. In May, he incorporated his business. How is the inventory handled at the end of April; do I have to attach a statement explaining the movement of the inventory or just show it as the beginning inventory?
Thanks

Brian

It is not beginning inventory. The corp purchased the inventory from the SP. If value at time of xfer was 5K, then increase sales of SP by 5K and have zero ending inventory which will have the effect of increasing COS by 5K, net effect is zero. On corp books show as purchase with offset being due to shareholder if there was not any actual cash involved.

[Brian EA]

It is not beginning inventory. The corp purchased the inventory from the SP. If value at time of xfer was 5K, then increase sales of SP by 5K and have zero ending inventory which will have the effect of increasing COS by 5K, net effect is zero. On corp books show as purchase with offset being due to shareholder if there was not any actual cash involved.

Thanks kathyc2

Brian

[TaxGuyBill]

I'm completely clueless about this type of thing, so I could be wrong, but that doesn't sit right with me.

Isn't it a capital contribution, and/or a §351 transfer?

https://www.law.cornell.edu/uscode/text/26/351

If it was the other way around (corporation to sole proprietor), I would totally agree with Kathy. But I would THINK that a sole proprietor to corporation would fall under the non-recognition rules of §351.


Again, I have no experience with this, so I could be wrong.

[Uncle Sam]

Proprietorship to Corporation

TaxGuyBill is right.
Sec. 351 incorporation rules exist here - you need to read up on the process to do it right.

[kathyc2]

TaxGuyBill is right.
Sec. 351 incorporation rules exist here - you need to read up on the process to do it right.

So, you are saying that any property coming from a shareholder to the corp MUST be treated as capital and CANNOT be treated as a sale from the shareholder to the corp? That's never been my understanding.

[Uncle Sam]

Sole proprietor to S Corp

Yes - FMV issues need to be addressed regarding assets being transferred in and debts assumed.