LLC Question

[quicksam]

LLC formed and elected to be taxed as a S Corp. They have filed 2 1120S since then. They have decided they do not want the aggravation of filing all the quarterly payroll reports that go along with the S Corp and want to switch back to being an LLC and filing as Sole Prop.

I know to do this I need to withdraw the election to be taxed as an S Corp, and file a new Form 8832. I also need to stop the payroll reports.

They want to do this effective December 31st, 2016. Their personal and S Corp for 2016 is on extension. They intend 2017 return to be filed as LLC being taxed as Sole Prop.

What are some of the things we need to look out for?

How do we handle the basis in property currently under depreciation?

Are there any tax consequences for the assets that were 179 expensed?

Thanks for any help and knowledge you can provide on this situation. Keep in mind we are keeping the LLC, but just wanting to change from being taxed as S Corp to Sole Prop.

Thanks

[Roland Slugg]

It is too late to revoke the S Corp election retroactive to January 1, 2017. In order to accomplish that the revocation statement had to be filed NLT March 15, 2017. Your client's revocation can be made effective only as of the date it is filed or on a future date. I strongly suggest you read Regs §1.1362-2 and §1.1362-6.

Throughout your post you referred to "they," suggesting that the LLC has at least two members. If it does, it will be taxed as a partnership, not as a sole proprietorship.

[TaxGuyBill]

You keep saying "they". Is it a Multi-Member LLC? Is it in a Community Property State?


Edit: Roland beat me to it. :-)

[quicksam]

I keep referring to "they" because the clients are a husband and wife for the personal return. It is not a community property state. The wife has her own job. It is a single member LLC, and the previous tax person talked him into the LLC with the S Corp election.

He is frustrated with the cost and the quarterly reports.

He did take a lot of 179 expense over the last couple years inside the SCorp. On a few other forums, members are saying that withdrawing the S Corp taxation converts it to a C Corp, and there will be a lot of tax consequences when changing to the sole prop return.

I know withdrawing S election on a regular set up Corp converts it to a C Corp, but wasn't sure with the LLC Designation.

[Snaggletooth]

Partnership is Available

If this is a corporation, and the S corp is revoked, then it must be a C corp.

But you say it is not. It is not a corporation but an L L C. Revoking the S corp thus opens the door to a partnership election, if the entity is owned by husband and wife. As long as there are two owners, a proprietorship is not an option, unless they choose a husband/wife joint venture.

[quicksam]

If this is a corporation, and the S corp is revoked, then it must be a C corp.

But you say it is not. It is not a corporation but an L L C. Revoking the S corp thus opens the door to a partnership election, if the entity is owned by husband and wife. As long as there are two owners, a proprietorship is not an option, unless they choose a husband/wife joint venture.

It's a single member LLC. The wife has her own job working somewhere else.

[kathyc2]

I wouldn't think if would effect depreciable assets as you are not changing the entity that owns the assets, only how the entity is taxed.

The fact that the wife has another job does not matter. What would matter is if she is listed as a member on the original LLC docs.

[spanel]

I wouldn't think if would effect depreciable assets as you are not changing the entity that owns the assets, only how the entity is taxed.

The fact that the wife has another job does not matter. What would matter is if she is listed as a member on the original LLC docs.

Is there a 5 yr wait after electing S status to switch?

Chris

[BHoffman]

Is there a 5 yr wait after electing S status to switch?

Chris

There is a five year wait after terminating an S election before the election can be made again.

[spanel]

LLC formed and elected to be taxed as a S Corp. They have filed 2 1120S since then. They have decided they do not want the aggravation of filing all the quarterly payroll reports that go along with the S Corp and want to switch back to being an LLC and filing as Sole Prop.

I know to do this I need to withdraw the election to be taxed as an S Corp, and file a new Form 8832. I also need to stop the payroll reports.

They want to do this effective December 31st, 2016. Their personal and S Corp for 2016 is on extension. They intend 2017 return to be filed as LLC being taxed as Sole Prop.

What are some of the things we need to look out for?

How do we handle the basis in property currently under depreciation?

Are there any tax consequences for the assets that were 179 expensed?

Thanks for any help and knowledge you can provide on this situation. Keep in mind we are keeping the LLC, but just wanting to change from being taxed as S Corp to Sole Prop.

Thanks

Has he had profits in the last 2 years? If so, it wont take very long for the additional SE tax to eat up the cost of quarterly forms/tax return.

Chris

[MichaelDi09]

Opposite scenerio question

Has he had profits in the last 2 years? If so, it wont take very long for the additional SE tax to eat up the cost of quarterly forms/tax return.

Chris

I have client who is a multi member LLC (partnership), has 70% ownership/profit/loss interest, and children , who split the remaining ownership interest/profits 15% each.

My client is collecting social security and not active in business, but has difficulty giving up control and children equity is nil and no interest in purchasing larger stake in business.

Both children are managing members and receive Guaranteed pymts of $70 k plus/yr.

I suggested they elect to be taxed as S-corp and allow 70% owner to be taxed as limited member and avoid SE taxes.

What is best scenario, if children don't want any increase in their respective profit/loss % ?

The children pay large fed/state estimated taxes as is, so Just looking for best scenario to lower their SE taxes/or Income taxes.

Appreciate any ideas.