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Level 1

Dissolved sole proprietorship to form s corp - how to transfer over deductions

My business has been a sole proprietorship for the last 4 years. In 2017, I dissolved the sole proprietorship to form a S-Corp. Is there anyway I can transfer all of my equipment deductions / other deductions into the s-corp for easier filing?

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Level 20

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Thanks for clarifying. Let me start by pointing out what I'm sure you already know, for the sake of others who may read this thread and find it helpful. So please bear with me on this. 🙂

A business that has a single owner, such as a sole proprietorship or single member LLC is considered a disregarded entity by the IRS. Therefore all business income and expenses for this type of business is reported on SCH C as a part of the business owner's personal tax return.

A S-Corp is considered a physically separate taxable entity all by itself. Therefore an S-Corp reports all of it's business income and expenses on an IRS Form 1120-S Corporate Return. TO do this with TurboTax, you can not use the same program that you use to file your personal 1040 tax return. You must use a completely separate program call TurboTax Business, which is different from Home & Business.

TurboTax Business is not available as an on-line product, or for MAC computers. It's for the Windows platform *only*. TurboTax business can be purchased directly from TurboTax at https://turbotax.intuit.com/small-business-taxes/ though you can probably find it significantly cheaper in a retail store in your local area. If you purchase it from TurboTax on line, you do NOT have to wait for the CD to be delivered. You have the option of downloading the CD installation file to your windows computer immediately after you pay for it. Then you can install the TurboTax Business program right away and start using it immediately.

Okay, basically there are two things you need to do. First, you need to close the sole proprietorship which you have already been reporting on SCH C as a part of your personal tax return. THen  you will "open" your S-Corp business using TurboTax business. So here's what you do first, to close your SCH C business and report to the IRS that it is closed. Note that most likely you will not be aware of it, but we "are" accounting for the assets that you will be transferring to the S-Corp *when we get to that point*. Also, do not jump the gun and e-file your tax return either. It's vitally important that you not e-file "any" tax return, until you have completed "all" tax returns (that's federal and state for both your personal return, and the corporate return) and you are satisfied and happy with the results.

            • Closed SCH C Business

You need to report your business as "sold or otherwise disposed of".

Start working through your business "as if" you still own it. On the 2nd or 3rd screen in select the option for "I sold, closed or otherwise disposed of this business in 2016". If prompted for the date, enter the day after you last day of business in 2017.

If your business had no income in the tax year, you can not leave the business income section blank. You 'must' enter a digit, even if that digit is a ZERO.

If you had no business expenses, then you can leave that blank and don't even have to work that section through, if you don't want to.

If your business carried an inventory, the end of year (EOY) inventory must be zero. If it's not, then in the COGS section indicate that you removed all of the remaining inventory for personal use. that effectively makes your EOY inventory balance, zero.

If your business had assets, then you must show the disposition of those assets. In the Business Assets section work through each individual asset on at a time, and select YES on the screen, "DId you stop using this asset in 2016?". Then on the next screen, "Special Handling Required?" if you sold the asset, select no and you will be prompted for your sales information on that specific asset. If you did NOT sell the asset, click the YES button. You must do this for each individual asset listed, even if it's already fully depreciated.

If you claimed any vehicle expenses in your business at any time from the day you opened your business, then you must show the disposition of that vehicle. Work through the Business Vehicle Expenses section and indicate that you stopped using that asset in the business, when prompted. Then show your disposition of that vehicle. Most likely, you'll indicate that it was removed for personal use.

Once you have done all the above, that will make the 2017 tax year the last year you will file a SCH C for this specific business. For you specifically creexl, once you have completed the SCH C you need to select the FILE tab. Then click the "Print/SAVE For Your Records" tab and click the blue PRINT button on that screen.

Then select "Tax return, key calculation worksheets" and click the blue "print preview" button at the bottom right of that window. This will open the selected pages in a PDF file. Print out a hard copy of that PDF because you're going to need figures from some of those pages, when you start the 1120-S corporate return in TurboTax Business.

Hollar back my way once you've completed all the above. If you've not had any issues, we'll continue. If you do have issues, then we'll deal with them before continuing.

15 Replies
Level 20

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Assets are transferred. But what I define as deductions are not something that is transferable. Are you possibly referring to NOL carryovers?
Level 1

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Sorry I meant assets. I can't figure out how to get them to transfer over within the turbotax application since the new business has a slightly different name followed by Inc.
Level 3

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Hi I have a piggyback question hopefully you can help with. We are doing a late S-corp conversion from Sch C as of 1/1/17. The business already had the EIN for 2016, and the return was filed with a vehicle that had been depreciated since 2013 (so 2017 would be the last year, but it would be a pretty small amount). For the 2017 S-corp return, can we deduct mileage, or are we limited to doing actual because that was what was done in the first year, even though it was under Sch C? I am still doing a Sch C on the 2017 return also (this will be the last year) to pay FICA on the shareholder reasonable compensation; can I put down the vehicle as out of service on 1/1/17 on the Sch C and then deduct mileage on the S-corp?
Level 12

Dissolved sole proprietorship to form s corp - how to transfer over deductions

@mrawsky   You REALLY need to go to a tax professional.  Seriously, there are so many questions/problems with your comments, I don't even know where to start.  Doing things wrong can easily cost you thousands of dollars, so please go to a tax professional.
Level 3

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Sorry Bill, but I AM a tax professional--guess I didn't actually state that. Possibly you think I'm a mess because I summarized the issues I am having, instead of asking the other questions you expect from a non-pro...?

I am working on my own starting just this year, so sometimes some specifics come up that I can't recall how they were handled when I worked at a firm. This specific item has been hard to track down in my research; typically these days most of my conversion clients do not try to depreciate items as a SMLLC, so this issue hasn't come up yet under my new book of biz. There are workarounds I'm doing (like the FICA taxable wages on Sch C) that I know from experience and talking with MANY CPAs I've worked with, who have worked in taxes for decades, that are tried and true. The ONLY thing I'm concerned about here is what to do with the mostly-depreciated assets, and whether I have to transfer them into the S-corp and continue depreciating them as they were on the Sch C, or do I just expense the remaining depreciable value as FMV/owner contribution under the S-corp, and also whether I HAVE to do that with the vehicle or can now take mileage under the S-corp if we dispose of it 1/1 under Sch C. As a SMLLC, we are continuing to use the same EIN for the S-corp that was used on Sch C.

Sorry but I don't know if having a tax pro ask a Q on here is considered taboo. I don't normally post on such message boards.
Level 3

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Also I am starting to think I'll have to do a 351, but again, would like to avoid transferring the vehicle over.
Highlighted
Level 12

Dissolved sole proprietorship to form s corp - how to transfer over deductions

It would be to your advantageous to find another local tax professional as a 'mentor' for things like this. Seriously, if you are preparing corporate returns, you need to be very familiar with them or have somebody to assist you and review them with you.


Here are a few of the potential issues I see:


1) You mentioned a "late S-corp conversion". Do you mean you are NOW electing the S-corp status, or that the election was timely filed, and the tax return is just being filed late? It does not qualify for the late election, as it must have been treated as a S-corporation, which would include payroll.
2) Yes, some tax preparers put the compensation on Schedule C. They are also signing false tax returns. That is not correct, and you would be signing a false tax return if you do that.
3) If the vehicle was not contributed to the corporation, it doesn't go on the corporate tax return. It can't deduct expenses for something it doesn't own. If there was an Accountable Plan and the shareholder submitted timely reimbursement reports to the corporation (minimum of every 60 days), the corporation could deduct the reimbursements. Otherwise, it is an Employee expense on Schedule A, subject to the 2% limitation (and subject to the amount of W-2 wages for that business).
4) Corporations do not qualify to use the Standard Mileage Rate.
Level 3

Dissolved sole proprietorship to form s corp - how to transfer over deductions

I do have a mentor; sometimes it takes a little while to hear back from him & I was hoping to have this wrapped up this week. Thanks for your input. I will discuss these issues with him.
Level 20

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Thanks for clarifying. Let me start by pointing out what I'm sure you already know, for the sake of others who may read this thread and find it helpful. So please bear with me on this. 🙂

A business that has a single owner, such as a sole proprietorship or single member LLC is considered a disregarded entity by the IRS. Therefore all business income and expenses for this type of business is reported on SCH C as a part of the business owner's personal tax return.

A S-Corp is considered a physically separate taxable entity all by itself. Therefore an S-Corp reports all of it's business income and expenses on an IRS Form 1120-S Corporate Return. TO do this with TurboTax, you can not use the same program that you use to file your personal 1040 tax return. You must use a completely separate program call TurboTax Business, which is different from Home & Business.

TurboTax Business is not available as an on-line product, or for MAC computers. It's for the Windows platform *only*. TurboTax business can be purchased directly from TurboTax at https://turbotax.intuit.com/small-business-taxes/ though you can probably find it significantly cheaper in a retail store in your local area. If you purchase it from TurboTax on line, you do NOT have to wait for the CD to be delivered. You have the option of downloading the CD installation file to your windows computer immediately after you pay for it. Then you can install the TurboTax Business program right away and start using it immediately.

Okay, basically there are two things you need to do. First, you need to close the sole proprietorship which you have already been reporting on SCH C as a part of your personal tax return. THen  you will "open" your S-Corp business using TurboTax business. So here's what you do first, to close your SCH C business and report to the IRS that it is closed. Note that most likely you will not be aware of it, but we "are" accounting for the assets that you will be transferring to the S-Corp *when we get to that point*. Also, do not jump the gun and e-file your tax return either. It's vitally important that you not e-file "any" tax return, until you have completed "all" tax returns (that's federal and state for both your personal return, and the corporate return) and you are satisfied and happy with the results.

            • Closed SCH C Business

You need to report your business as "sold or otherwise disposed of".

Start working through your business "as if" you still own it. On the 2nd or 3rd screen in select the option for "I sold, closed or otherwise disposed of this business in 2016". If prompted for the date, enter the day after you last day of business in 2017.

If your business had no income in the tax year, you can not leave the business income section blank. You 'must' enter a digit, even if that digit is a ZERO.

If you had no business expenses, then you can leave that blank and don't even have to work that section through, if you don't want to.

If your business carried an inventory, the end of year (EOY) inventory must be zero. If it's not, then in the COGS section indicate that you removed all of the remaining inventory for personal use. that effectively makes your EOY inventory balance, zero.

If your business had assets, then you must show the disposition of those assets. In the Business Assets section work through each individual asset on at a time, and select YES on the screen, "DId you stop using this asset in 2016?". Then on the next screen, "Special Handling Required?" if you sold the asset, select no and you will be prompted for your sales information on that specific asset. If you did NOT sell the asset, click the YES button. You must do this for each individual asset listed, even if it's already fully depreciated.

If you claimed any vehicle expenses in your business at any time from the day you opened your business, then you must show the disposition of that vehicle. Work through the Business Vehicle Expenses section and indicate that you stopped using that asset in the business, when prompted. Then show your disposition of that vehicle. Most likely, you'll indicate that it was removed for personal use.

Once you have done all the above, that will make the 2017 tax year the last year you will file a SCH C for this specific business. For you specifically creexl, once you have completed the SCH C you need to select the FILE tab. Then click the "Print/SAVE For Your Records" tab and click the blue PRINT button on that screen.

Then select "Tax return, key calculation worksheets" and click the blue "print preview" button at the bottom right of that window. This will open the selected pages in a PDF file. Print out a hard copy of that PDF because you're going to need figures from some of those pages, when you start the 1120-S corporate return in TurboTax Business.

Hollar back my way once you've completed all the above. If you've not had any issues, we'll continue. If you do have issues, then we'll deal with them before continuing.

Level 1

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Got it all done with my printed key calculations worksheets. I'm now ready to fire up Turbotax Business and begin on my corporate returns correct?
Level 20

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Yes. Now that you've removed all the assets of the SCH C business for personal use, that stops depreciation on those assets effective the date you stopped using those assets in the business.
Now in TurboTax Business go ahead and get started. Below is information that you will need as you work it through.
 - Date business started - This will be the date the business originally opened, and will be the same date you opened the SCH C business all those years ago.
 - Date of incorporation - This date will be one day AFTER you closed the SCH C business.
Now for the assets, you need to find the IRS Form 4562 from the printout you did for the SCH C business that was closed. There's two of them that print in landscape format. You want the one that is titled "Depreciation and Amortization Report"  You need to match things up with this report, as you enter your asset information into the Business program.
If you took a Special Depreciation Allowance or SEC 179 deduction on an asset, just skip that asset for now, and we'll deal with it last.
 When asked for the name or description of the asset, enter it exactly as it appears under the Asset Description column of the 4562.
 When asked for date the asset was placed in service, the date you enter in the program must match the date under the Date In Service column for that asset.
 When asked for the cost of the asset, the amount you enter must match what is in the Cost (Net of Land) column for that asset.
 When/if asked for business use percentage, I'm assuming 100%
 When asked for prior depreciation already taken on the asset, you have to do a bit of addition to get the "correct" figure you will enter in the business program. Basically, you have to include the current year (2017) depreciation already taken for that asset on the SCH C. So to get the correct number to enter in the business program for prior depreciation already taken, take a look at the 4562 from the SCH C. Add together the amounts in the Prior Depreciation and Current Depreciation column for that asset. Then when the business program asks you for the prior depreciation already taken on that asset, you will enter the total you got, there.
That should be enough to get you going on this.
Just keep in mind that you can not file your personal return yet. After you complete the business return, the business will issue you a K-1 which you will need to report on your personal return. Also, it matters in what order you e-file too, so that you don't end up with an unjustified rejection that will force you to have to mail your returns to the IRS.
Level 1

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Hi Carl.  I have a similar situation.  You mentioned above that you would deal with assets with special depreciation already taken last but it doesn’t seem like that was ever addressed.  I have a vehicle that I used in my sole proprietorship and took special depreciation on when I put it into service.  I use the same vehicle now for my s corp.  My main concern is recapture when I close out my sole proprietorship.  How do I avoid this or deal with this?  Help please!
Level 20

Dissolved sole proprietorship to form s corp - how to transfer over deductions

@mmandrs please start a new thread. As an add-on to this thread, I can guarantee you that we *WILL* get confused trying to deal with "similar" situations in the same thread and you *WILL* get incorrect information. Each situation is unique, even if "similar". Plus, when it comes to business use vehicles, they are their "own beast" when it comes to this depreciation stuff.
Level 1

Dissolved sole proprietorship to form s corp - how to transfer over deductions

Ok thank you!  Is that just posting a new question to the community?