Discussion:S-Termination & Wait Period
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Discussion Forum Index --> Tax Questions --> S-Termination & Wait Period
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| 13 July 2009 | |
| Hi All,
Single member LLC who elected S-Status many years ago wishes to terminate the S-Election and operate as "disregarded entity" for 2010. Question is, once the S-Election is terminated, the 5 year wait period kicks in and I was under the impression the SMLLC must operate as a C-Corp (as opposed to reporting on a Schedule C) for 5 years. I'm finding it difficult to find relative guidance and any help is appreciated. | |
Harry Boscoe (talk|edits) said: | 13 July 2009 |
| An SMLLC really has *two* choices [elections] that it can make (and then "unmake"): First, whether to be treated, for income tax purposes, as a corporation or as a "disregarded entity." And then, if the choice/election has been made to be treated as a corporation, there's the additional choice/election to be treated as an S corporation. Which of these elections does your SMLLC want to revoke? Both, it sounds like.
And also - the curiosity is killing us... - how does this SMLLC communicate with you? Does it speak through its owner? | |
Harry Boscoe (talk|edits) said: | 13 July 2009 |
| So, I was eagerly reading KPMG's on-line discussion of the rescission of various check-the-box elections, until I read this sentence: "The revenue ruling permitted the recession to take place without gain being recognized."
Right now I'm doubled up with laughter, LOL, ROTF, guffaw, guffaw.... If you don't get it, you owe me a PBR! | |
Beangrinder (talk|edits) said: | 13 July 2009 |
| Yes, don't revoke the S election. Shut down the S Corp this year (terminate the corp, don't revoke the election).
Next year, file Sch C. | |
Harry Boscoe (talk|edits) said: | 13 July 2009 |
| "Shut down" like distribute the assets and liabilities to the owner? A taxable event? | |
| 13 July 2009 | |
| Fairly new to forum so not following the communication question from HB, however the owner does directly communicate with my firm. I have actually never met the client as an associate is the client contact on this one. The question is, is it permissible for a SMLLC to revoke it's S-Election and immediately revert back to being taxed as a disregarded entity (1040), or must it file as a C-Corp for 5 years?
My client is a tax-basis medical practice and it isn't feasible to dissolve the S-Corp and recontribute, no 351 and would be taxable event (collection of a/r). Thanks. | |
Beangrinder (talk|edits) said: | 13 July 2009 |
| SMLLC and LLC are entities created by state statues. IRS recognizes corporation, partnership, or sole proprietor. The subchapter S election is made by a corporation, not by a sole proprietor. Therefore, when the S election is revoked, it goes back to being a corporation without subchapter S.
Do you mean client is cash-basis medical practice? When a cash basis S corp closes down, A/R becomes income? A/P then becomes expenses? Is that true? The biggest client shockers with shutting down S Corps I have come across is when their negative basis triggers a gain. You can close the S Corp which will give you the sole proprietor or you can revoke the S election which will give you a C Corp. | |
| 13 July 2009 | |
| Thanks Bean - I agree with your analysis and, yes the client is on the cash basis, not accrual. A/R would become income upon dissolution with a/p to offset.
Not sure I follow the negative basis comments though. Unless the client is using shareholder loan basis to deduct losses, which could trigger gain on dissolution if loan is not repaid, he should never have a negative tax basis in his stock. Possibly negative R/E but not basis? Appreciate the comments! | |
Harry Boscoe (talk|edits) said: | 13 July 2009 |
| I'm pretty sure that the required five-year waiting period is *before* the election to revert to "disregarded entity" status, and I'm very sure that the reversion is treated as a liquidation of the corporation and a taxable distribution of the corporation's assets to its owner. Yes, the S corporation will be taxable on its cash basis accounts receivable. Check this in the Regs at 301.7701-3(c)(1)(iv) and -3(g)(1)(iii).
Apologies for my lame attempt at humor: trying to make the SMLLC into a sentient being, with wishes and feelings, was a dud.... | |
| 14 July 2009 | |
| Brent, you really haven't given us enough info to answer your question. Did the LLC ever report as a Sole Proprietor? If the answer is yes, then you may revoke the S election immediately, but not the check the box election. | |
KatieJ's post on terminating association / S elections
| 14 July 2009 | |
| Reg. Sec. 301.7701-3(c)(1)(v)(C): S corporations. An eligible entity that timely elects to be an S corporation under section 1362(a)(1) is treated as having made an election under this section to be classified as an association, provided that (as of the effective date of the election under section 1362(a)(1)) the entity meets all other requirements to qualify as a small business corporation under section 1361(b). Subject to § 301.7701-3(c)(1)(iv), the deemed election to be classified as an association will apply as of the effective date of the S corporation election and will remain in effect until the entity makes a valid election, under §301.7701-3(c)(1)(i), to be classified as other than an association.
I read this to mean that if an LLC/S corp files a valid (c)(1)(i) election to be taxed as a disregarded entity ("other than an association"), the S election is automatically terminated. Reg. Sec. 301.7701-3(c)(1)(iv) provides the 5-year waiting period to change an election that was made under (c)(1)(i). The last sentence says, An election by a newly formed eligible entity that is effective on the date of formation is not considered a change for purposes of this paragraph (c)(1)(iv). So if Brent's client's LLC made the (c)(1)(i) election to be taxed as an association/S corp effective at the date of its formation, there is no 5-year waiting period and it can change to disregarded entity status at any time. So I think Brent's client can make the change at any time if the association/S election was made at the inception of the entity. If it ever was treated as a disregarded entity (sole proprietor), then it must wait 5 years from the effective date of the association/S election. Termination of the association/S election is a taxable event under Reg. Sec. 301.7701-3(g)(1)(iii): Association to disregarded entity. If an eligible entity classified as an association elects under paragraph (c)(1)(i) of this section to be disregarded as an entity separate from its owner, the following is deemed to occur: The association distributes all of its assets and liabilities to its single owner in liquidation of the association. | |
Harry Boscoe (talk|edits) said: | 14 July 2009 |
| Awesome. Awesome and subtle. | |
| 15 March 2012 | |
| KatieJ's post dealt with S Corporation, what about C Corporation? Here are the facts...
New client: 1. Formed an MMLLC on 8/22/11 2. Filed Form 8832 to be taxed as a corporation 3. Received an approval with an effective date of 8/22/11 4. Transferred 3 rental properties into the LLC in November 2011 (assets were acquired in 2008, 2009, and 2010 and held personally) The LLC is a real estate holding company (2 4-unit apartment buildings + 1 house) and C/S corp isn't considered optimal. I'd like to re-elect to treat the MMLLC as a partnership effective 8/22/11. Is this possible? Based upon KatieJ's post, it appears that the 5-year waiting period doesn't start with the initial election if its effective date coincides with entity formation. If so, would we file a new 8832 to elect partnership status? Would the election be retroactive to 8/22/11 or the filing date in 2012? FYI...the client indicates that there is currently no capital gain on the properties. | |
| 15 March 2012 | |
| New client formed LLC in August 2011 to hold 2 4-unit apartment buildings. He didn't consult with anyone and filed form 8832 thinking it would create an S-corp. OOPS!. How best to handle this situation? File late 2553 then distribute (sell) properties and put into a newly formed LLC? Forget about filing 2553 and distribute (sell) properties and put into new LLC? There shouldn't be much gain, if any, over the 6-months. | |
| March 15, 2012 | |
| Duh, your client just dodged a self inflicted bullet, well, wait, it may be worse than I imagined. Didn't he just create a C corp, then, instead??!! If so, you have to file the 2553. If he's really stupid and lucky and didn't change the 1065 status, that's what you want.
Or, best of all is to re-transfer/sell those properties and liquidate that corp so that they're not in one. | |
