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LLC filed as partnership making a late S election

Technical topics regarding tax preparation.
#1
El1  
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An LLC filed 2020 initial tax return as a partnership. The owners want to make a late S election now for 2021.

1. Does 2020 1065 need to be amended and marked "final" since 2021 will be filed on 1120S? There was a minimal activity in 2020 and the 1065 was already amended once by the previous accountant (don't know why).

2. The clients' attorney is advising to convert the LLC to a corporation with CA SOS, I assume in 2022.
If a late S election is granted by the IRS back to 1/1/2021, but the entity is converted with the state to an S corp in 2022:

a. Should they convert 1st and then file the S election or doesn't matter? For example form 2553 would list ownership interest for an LLC, but a number of shares for a corp.
b. Would the entity need a new EIN in 2022 when converted with the state?
c. What happens to the S election under the old EIN if a new EIN is required?
d. Would a short year return be required for before and after conversion periods?
e. I think CA state corp number wouldn't change in a conversion, but would it create a mess to file federal returns with different EINs with the same state corp number?
f. There's a large profit in 2021 and the owners would benefit from an S election in 2021 due to the QBI deduction, what's the best way to handle this situation without creating a massive headache? The attorney is open to keeping the entity as an LLC with the state if that makes things easier.
 

#2
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1. No.

2.
a. I would do the S election first for the LLC, if they want the S status for 2021.
b. & c. Our firm converted from a corporation to an LLC several years ago, just changed the legal structure of the same existing entity. We sent the IRS a copy of the official name & entity change from the secretary of state, and the IRS sent back a letter saying everything was hunky dory and that our earlier S election was still in place. We kept the same EIN.
d. No short year is needed if there's no change in EIN and no change in S status in the middle of the year.
e. No comment, I have no idea.
f. Yes, why not just keep the entity as an LLC? I don't understand the reason for switching to a corporation. Just have the LLC make an S election. The benefit of the LLC is that you can switch back later to a partnership or whatever. Like if the law changes and they make S-corp profits subject to SE tax, I'm thinking we would have our firm LLC switch to partnership status probably.
 

#3
BTJig  
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Here is a great article from the Tax Advisor regarding the untimely filing of Form 2553 and/or Form 8832. There are some nuances in this process that you'll want to take note of, due to the late election.

https://www.thetaxadviser.com/issues/20 ... s-llc.html
 

#4
El1  
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beardenjv wrote:1. No.

2.
a. I would do the S election first for the LLC, if they want the S status for 2021.
b. & c. Our firm converted from a corporation to an LLC several years ago, just changed the legal structure of the same existing entity. We sent the IRS a copy of the official name & entity change from the secretary of state, and the IRS sent back a letter saying everything was hunky dory and that our earlier S election was still in place. We kept the same EIN.
d. No short year is needed if there's no change in EIN and no change in S status in the middle of the year.
e. No comment, I have no idea.
f. Yes, why not just keep the entity as an LLC? I don't understand the reason for switching to a corporation. Just have the LLC make an S election. The benefit of the LLC is that you can switch back later to a partnership or whatever. Like if the law changes and they make S-corp profits subject to SE tax, I'm thinking we would have our firm LLC switch to partnership status probably.


Re your reply to #1
"An existing entity (such as a limited liability company (LLC) classified as a partnership) can elect under the check-the-box rules to be classified as a corporation. If the election is made, the entity is deemed to transfer all of its assets and liabilities to the corporation in exchange for the corporation's stock. The entity is then deemed to distribute the corporation's stock to its owners in complete liquidation (Regs. Sec. 301.7701-3(g)(1))."
This suggests a final 1065 needs to be filed with the balance sheet zeroed out?
 

#5
El1  
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BTJig wrote:Here is a great article from the Tax Advisor regarding the untimely filing of Form 2553 and/or Form 8832. There are some nuances in this process that you'll want to take note of, due to the late election.

https://www.thetaxadviser.com/issues/20 ... s-llc.html


The article suggests that a final 1065 should be filed and balance sheet zeroed out?
"An existing entity (such as a limited liability company (LLC) classified as a partnership) can elect under the check-the-box rules to be classified as a corporation. If the election is made, the entity is deemed to transfer all of its assets and liabilities to the corporation in exchange for the corporation's stock. The entity is then deemed to distribute the corporation's stock to its owners in complete liquidation (Regs. Sec. 301.7701-3(g)(1))."

It doesn't address the EIN questions and the IRS instructions on this are conflicting:
https://www.irs.gov/businesses/small-bu ... -a-new-ein

"Corporations
You will not be required to obtain a new EIN if any of the following statements are true.
Conversion at the state level with business structure remaining unchanged." - does this mean that an LLC who filed as partnership and converts at state level to corporation doesn't need a new EIN?

"Partnerships
You will be required to obtain a new EIN if any of the following statements are true.
You incorporate." - does this apply to multi member LLC's that convert with the state?

"Limited Liability Company (LLC)
You will not be required to obtain a new EIN if any of the following statements are true.
An LLC that already has an EIN chooses to be taxed as a corporation or as an S corporation." - doesn't specifically say if this applies to multi member LLC's or SMLLC's only.
 

#6
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El1 wrote:"An existing entity (such as a limited liability company (LLC) classified as a partnership) can elect under the check-the-box rules to be classified as a corporation. If the election is made, the entity is deemed to transfer all of its assets and liabilities to the corporation in exchange for the corporation's stock. The entity is then deemed to distribute the corporation's stock to its owners in complete liquidation (Regs. Sec. 301.7701-3(g)(1))."
This suggests a final 1065 needs to be filed with the balance sheet zeroed out?


Certainly. But I wouldn't bother to amend an already-filed return just for that. Although thought should be given to related issues, such as whether any of the partners might have a gain upon the dissolution of the partnership.
 

#7
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El1 wrote:"Corporations
You will not be required to obtain a new EIN if any of the following statements are true.
Conversion at the state level with business structure remaining unchanged." - does this mean that an LLC who filed as partnership and converts at state level to corporation doesn't need a new EIN?

Yes. It's the same legal entity, although they're moving from the LLC part of the state law to the corporate part of the state law. It would be different if you actually dissolved the LLC and then started a new entity (corporation).

El1 wrote:"Partnerships
You will be required to obtain a new EIN if any of the following statements are true.
You incorporate." - does this apply to multi member LLC's that convert with the state?

No. They're talking about if an existing general partnership forms a different new legal entity (corporation).

El1 wrote:"Limited Liability Company (LLC)
You will not be required to obtain a new EIN if any of the following statements are true.
An LLC that already has an EIN chooses to be taxed as a corporation or as an S corporation." - doesn't specifically say if this applies to multi member LLC's or SMLLC's only.

This is true for both multi-member LLC's and SMLLC's.
 

#8
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for your point e. on whether the corp number will change or not:
FTB numbers for CA Corp and SOS LLC numbers are different lengths, but both are tied to the FEIN (for their internal reference).


A while back, there was a client who was a LLC, should have filed 568, but the tax prepared filed a 565 General Partnership for a couple of years. The FTB kept sending notices because one or the other of their records showed the $800 that needed to be paid. Poor client paid $800 for the same years again and again because of those notices.

All to say, when I called to resolve the matter, the agent told me that returns that were incorrectly filed as 565 was under FEIN-1 and we just needed to write a letter explaining the mistake, outline all the payments made, tie FEIN and FEIN-1 (they literally created an account with ##-#######-1 to explain the "double" entry and going forward to just file the correct 568. Long winded to say, CA Corp and LLC numbers can be resolved by an agent, the key importance is to have your proper FEIN.
 

#9
El1  
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Partly Sunny wrote:for your point e. on whether the corp number will change or not:
FTB numbers for CA Corp and SOS LLC numbers are different lengths, but both are tied to the FEIN (for their internal reference).


A while back, there was a client who was a LLC, should have filed 568, but the tax prepared filed a 565 General Partnership for a couple of years. The FTB kept sending notices because one or the other of their records showed the $800 that needed to be paid. Poor client paid $800 for the same years again and again because of those notices.

All to say, when I called to resolve the matter, the agent told me that returns that were incorrectly filed as 565 was under FEIN-1 and we just needed to write a letter explaining the mistake, outline all the payments made, tie FEIN and FEIN-1 (they literally created an account with ##-#######-1 to explain the "double" entry and going forward to just file the correct 568. Long winded to say, CA Corp and LLC numbers can be resolved by an agent, the key importance is to have your proper FEIN.


I've dealt with similar issues before and it can be pain to resolve. That's why I'm proactively trying to avoid any issues with conflicting EIN or state corp numbers in this situation.
 


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