Carryover Depreciation or Restart?

[JoshinNC]

Taxpayer operates a sole prop Sch. C for several years. On 1/1/10 TP and spouse organize MMLLC taxed as Partnership. TP contributes all of Sch. C business property to MMLLC. Obviously, basis to Partnership is original purchase price less accum. depr. On the LLC's 1st return does the depreciation period restart or do we carryover the period as though it were originally purchased by LLC in the original purchase year?

Ex: Sch. C purchased printer on 1/1/08 for $1000 and took depr. deduction of $200 in 2008 and 2009 (just for easy math). Basis is now $600. Does the $600 now get depreciated over 3 remaining years beginning 1/1/10 or 5 years as though it is a new "purchase" to the MMLLC?

For some reason I just can't seem to convince myself that it is treated as a "new purchase" by the MMLLC.

[Nashville]

New Purchase

Josh bad news.

Because they began a partnership with a non-cash contribution, they've got a proverbial mess on their hands. The equipment is now carried at its fair market value as of the date it was contributed by the partner, and depreciation begins on this inflated basis. However the "old" basis must be tracked also, by the partner, in the event it is disposed by the partnership.

Double bookkeeping now results. The other partners (not the one who contributed the equipment) is allocated the additional depreciation expense that results, but only to the extent of the excess FMV over the carried value. But this is for tax reporting only, and doesn't affect the profit/loss sharing ratio, so that difference has to be tracked as well, for the depreciable life.

Last year's TTB for Small Business Version has a good presentation for this non-cash treatment. I haven't had much chance to read this year's version yet, but they probably have a good presentation in this year's version also.

Most customers enter into these partnerships with non-cash not realizing the horrible extra record-keeping required. If we have the chance to inform them, they usually will either avoid the situation or else find another preparer who will consent to underpricing their services so as not to account for the extra record-keeping.

[JoshinNC]

Nash

thanks so much!

[Snaggletooth]

Partnership Returns

or else find another preparer who will consent to underpricing their services so as not to account for the extra record-keeping.

I know a few tax preparers who will absolutely not offer their services to include 1065s unless all capital contributions are in cash. A couple of these preparers are fully knowledgeable and capable of doing the extra work, but will refuse simply because customers become irate at the extra fees. It is a huge sacrifice on the altar of customer satisfaction. Even if the client is informed in advance, they still gag when presented a bill for all the "extras" on a partnership return with non-cash partners.

The BIG (Built-in-gains) tax is a typical example. When these guys start the company, they swear they are going to keep this equipment FOREVER. 3-4 years into operations they sell the equipment and are horrified at being informed of the BIG tax.

There are other weighty factors involved in accepting a partnership return. Partners enter into business loving and trusting each other. Two years later, they hate each other and want out, and partnership is dissolved.

Sometimes we as preparers are placed into the position of advising clients of which entity to select, and when we warn them beforehand of the downsides of a partnership, it doesn't seem to do any good. The only thing that deters them is a jaw-dropping disclosure of a huge tax preparation fee.