Change of Business structure

[kps-2]

We closed a husband/wife llc partnership on Dec 31.  Jan 1 will go back to Qualified Joint Venture (sole proprietor structure)  This is the same business we've had for 20 yrs just different structure.  My question is what to do with the assets (tools) that were bought during the llc but will continue to be used in the sole propietorship.  We aren't disposing of them so I'm not sure how to report this on the final 1065.

[VictorW9]

This is quite a complicated issue because of the many tax implications that may arise in such an event. Ending the partnership is akin to dissolution and a final K-1 would have to be prepared and the shares of the assets distributed to the parties with likely additional tax implications. As you can see it can get really messy and you may want to consult with a tax professional for help.

Here's a resource to consult for help even though it doesn't exactly match your situation: 

Solved: My business was an LLC partnership for half of the ...

[Carl]

go back to Qualified Joint Venture (sole proprietor structure)

Just to clarify, a QJV can not have only one owner/member. However, if this is for rental property reported on SCH E, that can be designated as a QJV. But you have to go into forms mode in order to locate and check the checkbox for QJV on the SCH E worksheet. But if you're using the online version of TurboTax, forms mode just isn't possible unfortunately.

[Carl]

This will be complicated. I guarantee it. I would highly suggest you seek face-to-face professional help for this. Especially if you are required to file a state return, as this will double the issues you have to deal with.

Basically, you have to close the partnership and file a final 1065. The partnership will then issue each of you a "final" 1065 K-1.

Then you have to report the "new" QJV on SCH E as a part of your personal joint 1040 tax return. If you're using the CD version of TurboTax, you can pop into forms mode real quick and put a checkmark in that "Qualified Joint Venture" box on the SCH E worksheet. But if using the online version, forms mode is not an available option unfortunately.

[Rick19744]

One key fact is needed here.....what is your state of residence?

[kps-2]

We are in TN.  Just to clarify, we are a mom & pop and always have been.  (First a sole proprietor QJV, then LLC partnership when we briefly took on an employee, now back to sole proprietor QJV)  We run a service industry business so all of our assets have qualified for Section 179 depreciation deduction.  The last purchase was a couple IPads in 2018.  I am aware of the closing of the LLC and that we are starting a "new" business, but because the "new" business started Jan 1 this year I'll deal with that this time next year.  It's just the dissolution of these small assets that seem to be tripping me up.

[Rick19744 · Accepted solution]

Thanks for that detail.

You have a number of issues and possibly some confusion on entity structure.  I will provide some general guidance and explanation:

• A QJV requires both spouses to be involved
• In general, a QJV cannot be organized as an LLC.  There are exceptions for community property states, however, TN is not one of those states.
• So just to be clear, you can't have a QJV and be deemed a sole proprietor.
• What you may have done in the past, is the past.  This is not the forum to discuss all those details and what was or should have been done.  We will only discuss your current facts and resolution.
• Based on your facts, you have effectively closed and liquidated your LLC taxed as a partnership.  You need to file a final return.
• Since you were an LLC taxed as a partnership, you should have been maintaining a basis schedule of your investment in the LLC; each of you should have a basis schedule.
• All property distributed to you will be treated as a liquidating distribution.  This will need to be reported on the K-1 using Code C.  I will attached a link to the instructions for the K-1.  There is detailed information that needs to be reported as a result of this.
• As a result of the liquidating distribution you may have received "hot assets".  This in general will be depreciation recapture and possibly any receivables (net of payables) if you were on the cash method of accounting.  
• You must determine an overall gain or loss as a result of what you are doing; liquidating the partnership.  If you have hot assets distributed to you, some of your gain will be recharacterized as ordinary income.  It will not change the overall gain or loss, just the character.
• When you distribute out tangible property from the partnership / LLC, you generally take the same basis as the partnership.  However, this allocation of property basis cannot exceed your basis.  If it is either more or less, the regulations have a prescribed method as to what additional adjustments need to be made.
• I recommend you consult with a tax professional to make sure you get started on the right path for 2020; while it may just be nomenclature or semantics in the wording, just to be clear, you cannot be a sole proprietorship and a QVJ in 2020.  Make sure you get guidance in this area as you don't want a foot fault.  See a tax professional.
• Also read the information in the link provided in an earlier response.  I may have provided some other details in that response.
• https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf
• As has been noted, this is not an area for the feint of heart.  Partnership tax is complicated and recommend you get some help from a tax professional.
• Finally, you should contact the Secretary of States office.  You most likely need to complete something to dissolve your LLC since LLC's are organized under state law.