Changed from a sole proprietorship to a partnership LLC (husband/wife 50/50 members) in 2016. For disposing of business, should i check "sold to a related party"?

[Carl]

You sold nothing really. You'll have 3 SCH C's this year. On the first, (We'll call business A) original LLC just indicate that all assets were removed for personal use. When asked if special handling is required, indicate yes. Otherwise, you will have to put sales information in and you will be taxed on income you took out of your left pocket, and put in your right pocket. So don't "sell" it back to your selves. You have to do this for each individual asset one at a time. You're reporting this business as CLOSED on this SCH C.
The next two SCH C's will be for the new business. One for 50% of your ownership and the other for 50% of your wife's ownership.
On the SCH C for Business B (your 50%) you'll re-enter assets at 1/2 their value on the 4562 for Business A, and report 1/2 the depreciation on each asset already taken.  
You'll do the same on the Business C SCH C for your wife's 50%.
So for 2016 you'll be filing three SCH C's for this business. One to close the sole proprietorship owned by you, and the two to open a new sole proprietorship for each owner.
This gets to be a mess if vehicle expenses are involved, and there's only one vehicle. Generally, you'd be better off reporting the business as it's own partnership and filing a completely separate 1065 partnership return. But that requires TurboTax Business (Different form Home & Business).

[Justin5]

@Carl I have TurboTax self-employed (for personal + sole proprietorship taxes) and TurboTax Business. I'm wondering on TurboTax self-employed which answer to indicate when it asks how I disposed of my sole proprietorship. I uploaded a screenshot to the original question to help clarify

[Carl]

Select NO because you did not dispose of the business in any of those ways. Thanks for the screenshot, as I use the desktop version of Home & Biz, which is "basically" the same as online self-employed.
Since you'll be using TurboTax Business to file a 1065 partnership return, you'll only close the sole proprietorship on your personal tax return.
For now, lets just concentrate on closing the sole proprietorship on the SCH C with your personal tax return. You will NOT be creating any additional SCH C's on your personal tax return. You'll only have one SCH C on your personal tax return that reports the sole proprietorship as closed.
Pay attention to the date you close it. That's because your open date for the partnership will be one day AFTER you close the sole proprietorship.
Again, back to the sole proprietorship, you'll show each asset as "removed for personal use". That means on the "Special Handling Required?" screen, you will select YES.
You will also need to have the prior years AND the current year's depreciation taken on each individual asset. (You'll need that information later when setting up and opening your partnership in TT Business).
Make sure you write down the name of each asset exactly. You'll need to enter it *exactly* in TT Business, when you get to that point.
Also, note that you flat out can NOT file your personal tax return until AFTER you have completed the 1065 partnership return in TT Business.
Whew! Hope I didn't confuse you!

[Justin5]

@Carl Tracking with you. And it's great to get affirmation as what you laid out is about how I was planning to go about things. One follow up clarification, if I may: "You will also need to have the prior years AND the current year's depreciation taken on each individual asset." Here, you simply mean accurate note-taking for then entering into TT Business, correct? I'm assuming loading a current asset in to the new LLC will require some history based on what you're saying.

[Carl]

Absolutely. To affirm with an example what I'm leading up to. (it's been a few days, and you're probably) already there) let's say asset "A" shows a total of say, $3000 of prior year's depreciation, and $500 depreciation allowed for 2016. You closed this business on June 30th.
You now open the 1065 partnership on July 1st, and when entering the asset you'll be asked for the "in service" date. You will enter the "ORIGINAL" in-service date of say, 5 years ago. Then when it ask you for "prior deprecation already taken" on asset 'A", you'll enter $3500.  Got it?
Oh, and on the partnership return, is there a problem entering that prior year date for when the asset was placed in service? (hint, hint)

[Justin5]

@Carl Ha, there certainly is a problem. If I enter a date it accepts, it asks for how much I paid for the asset and whether it was new when it was acquired. If Asset A cost me $4000 new w/ $3500 depreciation previously, what is the program looking for here?

[Carl]

Exactly what it's asking you for. What you paid for the asset when you purchased it. Depreciation questions come later.

[Carl]

I take it you got the date right, I was expecting you to get wrong. At the very beginning it asks you the date the business was opened. You enter the "original date" you opened it as a sole proprietor on your SCH C, even it if was years ago. If you don't, then when you go to enter an asset's "in service" date of the original date placed in service on your SCH C, it won't let you. Yes, you will use all the original dates for everything, as reported on your last SCH C in your personal tax return that you filed with the IRS.
Remember, on your last SCH C you did not "dispose" of any assets. You merely removed them from the SCH C business, is all. When  you enter them in TT Business, the date the business acquired it/put the asset in service, is the same date as was entered on your SCH C.

[Justin5]

@Carl I did get it wrong in that at the start of TT Business I entered the LLC partnership start date as this year. You're telling me it should be the sole proprietorship start date, even though the LLC is new this year?

[Carl]

The partnership may be new, but the business is not. The "business" was started years ago, right? (I think you're just starting to get it now, but not *quite* there yet. Give it 10 more minutes.)

[Justin5]

@Carl Correct, but the business name is slightly different, does that matter?  Here's the reason I'm confused. From your earlier answer: "Pay attention to the date you close it. That's because your open date for the partnership will be one day AFTER you close the sole proprietorship."

[Carl]

Ah yes, that can be confusing. I went through the same thing when helping someone set up an S-Corp a few years back. The "business" opened in say, 2010. But the "Parnership" was established in 2016. Doesn't change the business open date. It only changes your ownership percentage, and the acquisition of a new partner on the date the Sole-proprietorship was no longer "sole".
Things "might" be different since this is not converting to a corporation. So I"d say if the 2016 open date for the partnership will still allow you to import the "prior depreciation already taken" on your assets, then you're fine. But I don't think it will because you can't put an asset in service in a business, before it's open for business. At least, I discovered that to be true with an S-Corp.

[Rick19744]

To expand on this, as Carl noted, you will need the depreciation information when you set up the assets in TT Business. 

The general rule under Sec. 721 is that no gain or loss is recognized on the transfer of property in exchange for an interest in a partnership (or LLC taxed as a partnership).  When depreciable property is contributed to a partnership, the partnership is treated as if it stepped into the shoes of the transferor partner. The partnership uses the depreciation method and remaining depreciable life used by the transferor.

In addition, you (both of you) will now need to begin tracking your basis in your LLC investment.

There is another rule that addresses contribution of assets where the FMV exceeds the adjusted basis of the assets contribution (Section 704(c)).  While technically this does apply, if you file a joint tax return (which I am assuming you do) then this really is a moot point since any adjustment will go on the same tax return and the tax will be the same in the end.

[Carl]

Thanks Rick. I do agree with what's being done here. I know that a partnership composed of a married couple filing joint can each report their share on their own separate SCH C's. But tax filing-wise and tracking wise, in my opinion it's much easier on the tracking as well as the paperwork, if the married couple just files a 1065 Partnership Return. That way, the partnership issues each partner a K-1 and each partner gets properly credited for their individual earnings on their joint tax return with less chance of human error and a whole lot less manual math work involved.