357c journal entry for LLC electing S

Client was SMLLC established in 2018 that had 2018 losses deductible via their liabilities (credit card debt).

They elected S status effective January 1, 2019. The only item on the balance sheet at that time was the $3K of credit card debt.

It's my understanding they will have a 357c gain on the assumption of the liability by the newly formed S Corporation, reportable on their 1040.

But what is the journal entry on the company books for this transaction?

The 2018 negative equity needs to disappear right? So....

..........??????? $3,000
....................Member's Equity $3000

The debt is the same for the S Corp as it was for the LLC a day earlier, so that's not my debit. What is my debit?

Looking at another thread, in the case where there are fixed assets in the equation, the $3K (in this case) would be added to the fixed assets, and depreciated along with them (not eligible for 179/bonus).

But in this case there are no fixed assets. Do I create a depreciable asset? Goodwill perhaps?

Logically, the company had real losses in 2018, those are reversed with the 357c gain, so the S Corp should be able to take the loss again, if and when they have the basis to do so.... so I think creating a new asset makes sense. I'm just not sure what to call it and what the depreciable life would be.

Sorry, stream of consciousness thread here. But I think Goodwill makes sense. S Corp took on LLC debt because there is some value inherent in the company. Whether that's true or not I don't know, but seems the only logical bookkeeping entry.

Would love a head nod or a correction. TIA

Did they use the 2018 losses?

Did the S corp really assume the credit card debt. Most small businesses have credit cards in owner's name. Why not just have the S corp pay the owner enough to pay down the credit card without actually assuming the debt?

Did they use the 2018 losses?

Yes

Did the S corp really assume the credit card debt. Most small businesses have credit cards in owner's name. Why not just have the S corp pay the owner enough to pay down the credit card without actually assuming the debt?

The credit card is in the owner's name, but it's 100% business use, we want to track/reconcile the account on the books, and most significantly, their 1040 income for 2019 is so miniscule reporting a 357c gain has zero tax impact on their 2019 returns.

The only item on the balance sheet at that time was the $3K of credit card debt.

The Balance Sheet had to balance. That's a credit. What was the debit?

The only item on the balance sheet at that time was the $3K of credit card debt.

The Balance Sheet had to balance. That's a credit. What was the debit?

expenses, rolling into negative member's equity.

I thought so but didn't want to assume.
So no cash, no fixed assets, no AR?

correct on all counts.

Well, it's not just bookkeeping or even accounting.

362(a)(1) says to increase the basis of any property the corp. acquired by the amount of gain to the members. So first order of business is what property was transferred.

362(d) limits the increase if the debt is non-recourse, but yours is recourse.

So was there goodwill or another intangible?

Well, I've been saying there are no assets, which is totally plausible.

**LLC borrows money to pay marketing company - loss, no assets.

I'd still be curious your answer in that scenario.

But in this case, this is a gym, and they DID actually purchase a lot of equipment for $1. So there actually are assets. Perhaps that's where the $3K is added, and then depreciated according to MACRS?

The fair market value of that equipment must be more than $1.

Right. Are you agreeing with my proposed treatment or am I missing something?

The only item on the balance sheet at that time was the $3K of credit card debt.
and
But in this case there are no fixed assets. Do I create a depreciable asset?
and
So no cash, no fixed assets, no AR?
correct on all counts.
and
The fair market value of that equipment must be more than $1.
Right. Are you agreeing with my proposed treatment or am I missing something?
Yes. The facts.
But in this case, this is a gym, and they DID actually purchase a lot of equipment for $1. So there actually are assets.
SMH.
It's my understanding they will have a 357c gain on the assumption of the liability by the newly formed S Corporation, reportable on their 1040.
Yes, ordinary income. 1245.

Thank you Nilodop. So, the facts are coming out in dabs and drabs. There is equipment. So we debit Gym Equipment (that has a zero basis, right?) credit the cc liability account. Individual recognizes income on 1040. Maybe inventory of health products.

MACRS, yes. I know §179 is not available. I think bonus is out.

Is the gym closed? Doesn't the SMLLC have a checking account that member monthly payments go into?

Where is the assumption of the liability?

I think the debit goes to credit card payable.

I think the debit goes to credit card payable.. Thereby making it disappear without paying it?

Didn’t the OPer say the credit card is actually in the owners name? If so, is it a shareholder loan?