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Level 2
posted Jan 18, 2025 2:21:09 PM

Effect of S corp conversion on previous payment/distribution

I am planning on setting up an LLC. Due to personal circumstances and uncertain tax law changes, I am not yet sure if I want to be taxed as an S corp. Suppose the following:
  1. In January, I set up the LLC as an SMLLC/disregarded entity
  2. In February, I transfer $10k of LLC income from the LLC bank account to my personal bank account
  3. In March, I file Form 2553 (S corp election) with a retroactive effective date of January
I understand the reasonable salary and payroll requirements with an S corp. But in the scenario above, how would the $10k have to be handled (since the LLC was not an S corp at the time of the transfer but became an S corp retroactively)? Would it have to be returned to the S corp and then paid out as a mix of wages and distribution? Or could it just be treated as a distribution as long as a reasonable salary is paid by the end of the quarter? Thank you.

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1 Replies
Level 15
Jan 18, 2025 2:43:53 PM

If the LLC makes the S-election, it *IS* an S-corporation at the time of transfer.

 

Depending on the intent, money coming from the S-corporation for personal use is either (a) Wages, (b) an owner distribution or (c) a loan to the shareholder (but a loan would require documentation of the loan).