Hi @Carl ,
I would definitely appreciate your help. My wife and I converted her sole proprietorship (SP) business to a two member LLC (husband and wife). If I understand correctly, SC is not a community property state, so the IRS considers the LLC a partnership (provided we don't file for a different classification and at this point, I don't see any reason for us to do so). If you do and have the time, feel free to mention why we might consider a different classification.
But moving on to the subject of the original post...
Below are the answers to your questions:
First let me tell you the business has been a hair salon for years, but we expanded (added a day spa in 2018)
1. ASSETS: The SP business does have a few assets, but they aren't extremely high value items (i.e. washing machines, furniture, massage tables, stylist stations, reception desk, computer, etc.)
SIDE NOTE: If it matters, through 2017 we have selected the section 179 deduction on all assets. We have filed an extension for 2018 and I am still trying to get everything organized.
2. INVENTORY: We do stock a little inventory(i.e. various hair products, lotions, blow dryers, irons, etc) Estimated value on average is about $15,000
3. EXACT DATE Sole Proprietor:10-01-2009
4. EXACT DATE LLC FORMED: 7-19-2019
All I have done thus far is file the LLC paperwork. I'm using QuickBooks to pull each 2019 business checking account statement one month at a time. I'm only vaguely familiar with QuickBooks, but I am pretty good with numbers and my background is in IT. I'm also fairly familiar with simple small business taxes from reading and researching in order to do her business taxes since 2009. However, I'm having a few issues with 2018 (but I'll ask that in a separate post).
As I'm preparing "from scratch" for our 2019 taxes, I'd genuinely appreciate any advice you can offer, especially in regards to the LLC conversion.
Not being in a community property state, you don't have the option of splitting things between two SCH C's on your joint tax return. Understand I may use "partnership" and "multi-member LLC" interchangeably here. For the purposes of this thread, the only difference is the spelling. Literally!
First, on the 1040 joint return you will show that the sole proprietorship was "closed, sold or otherwise disposed of" on Sept 30, 2018. (Oct 1st is the first day of the fourth quarter, and you don't want to have to deal with quarterly taxes on the sole prorietorship for just one day of the 4th quarter.)
Then you will show that all assets (depreciated or not) were "removed for personal use" on Sept 30, 2018. If you show anything other than removed for personal use, then you will asked for a sales price for the asset(s), and you did not sell them. The same holds true that you will show all inventory "removed for personal use" on Sept 30, 2018.
Of course, you will show all income and expenses for the business, up to Sept 30 2018 too. When done working everything through the SCH C and the SCH C is done, you'll need to print out the 4562's (both of them) for the business assets. You will need these for the partnership return. You will also need to know the exact amount that *you* paid for all the inventory removed from the sole proprietorship for personal use.
Understand that once all this is done, then and only then, can you start your first IRS Form 1065 Partnership return.
Now I sincerely hope you are using the CD/Desktop version of TurboTax 2018. All that you need to do can be (and will be) a real PITA with the online version. I don't use the online version. So I'm not that much help with navigation issues like I am with the CD/Desktop version of the program.
So get the above done and we'll go from there. You will have some math to do when entering/transferring your assets and inventory to the 1065 in TurboTax Business. It's really easy; but it's just as easy to do the math wrong and screw things up too. So that's why I"m taking this one step at a time. So close the SCH C business first per the above guidance, and once you have both 4562's printed we'll go from there.
Both 4562's print in landscape format. One is titled "Depreciation & Amortization Report" and the other is titled "Alternative Minimum Tax Depreciation".
One other thing. If you filed an extension for the 1065 partnership return, it was Due Sept 15, 2019. So it's now late. The late filing penalty for a partnership is $200 per month, per partner. So as of now you have a $400 late filing penalty that jumps to $800 after Oct 15th.
If you did not file an extension for the partnership, then your late filing penalty is now $2400 and jumps to $2800 after Oct 15th. Partnership returns are due March 15th. With an extension it's due Sept 15th.
Thanks for all the info. I'm confused regarding the need to file an extension for the partnership return. You state that is was due Sept. 15, 2019. I was told that LLC's are taxed pretty much the same way a sole proprietor or partnership is taxed. What I've read seemed to confirm that. The LLC was just formed mid 2019, shouldn't it be filed in the same manner and time frame as the sole proprietorship or are there completely separate rules.
Please tell me the info above in your last post is a mistake? Did you misread the formation date as being in 2018? If not, I am screwed. Oh my God, I wish I must have missed the email letting me know I had a response from you. I haven't filed any return or extensions. I'm feeling sick to my stomach. Have I really screwed up as badly as I think I have? If so, is there any advice you can offer me?
Please do not start a new thread each time you respond. It's an absolute headache at times to find the one you're responding to/talking about. Simply click the REPLY button at the bottom of the post you are responding to and go from there.
Being that your original post was in Sept 2019, I assumed the partnership was formed in 2018 since the TurboTax software was not available for the 2019 tax year at that time. So if the partnership was formed in 2019, you have until March 15th, 2020 to get it filed with no extension, so you don't incur any late filing penalties.
So right now, you're going to be jumping between the personal 1040 joint return and your first 1065 partnership return. But for the 1065 Partnership return you will need to purchase a physically separate program called TurboTax Business (different from Home & Business).
TurboTax Business is for completing and filing a tax return for a non-living non-breathing separately taxable/reportable entity. TurboTax Business can not be used for completing a personal 1040 tax return of any type. TurboTax business is not available as an online product or for MACs. It's for the Windows operating system only. You can purchase it at https://turbotax.intuit.com/small-business-taxes/ though you may find it cheaper at other authorized retailers of the program such as Wal-Mart or Target.
Also, understand that you can not file "any" tax return until you have completed and are satisfied with the results of "all" tax returns. For 2019 taxes your 1040 and your 1065 will basically affect and impact each other. So if there's a mistake pertaining to the subject of this thread, a mistake on one requiring you to amend it, will also require you to amend the other.
Finally, since SC imposes a personal income tax on earned income, that means you'll be be filing a personal return for the state, as well as a partnership return with the state. I am *NOT* at all familiar with state taxes and will not pretend that I can be helpful on that front. Fact is, I can't. SO this is yet another reason you don't want to file anything with any taxing authority until "YOU" are the one satisfied with the results.
You will start with your personal return to "close" the SCH C business permanently and forever without disposing of it.
In the start of that section select the option to indicate that you "sold or otherwise disposed of this business" in 2019. Then continue working things through "as if" nothing changed. You'll enter any and all business income received prior to the closing date of the business (which will be sometime in 2019) as well as any and all business expenses incurred prior to that closing date.
Next in the inventory section, your EOY (End of Year) inventory balance for this SCH C business must be $0. So if there is any unsold inventory left in this SCH C business, simply indicate that it was all removed for personal use and that makes the EOY inventory balance $0.
Next, work through the business assets. You must work through each individual asset one at a time and for each one select the option for "I stopped using this asset in 2019". The stop date you enter for each asset must be identical and will the last day the SCH C business was open for business in 2019. You'll be presented with a "special handling required?" screen on each asset. Since you are not selling the asset (we're transfering it to the partnership) select YES and press on.
For each asset you will need to write down:
- The name of the asset exactly as entered into the program.
- The date the asset was originally placed "in service"
- The total of all prior year's depreciation already taken.
- SEC179 depreciation taken if applicable to that asset (and labled "as" a SEC179 deduction).
- The 2019 depreciation taken.
- The date the asset was removed from the business for personal use.
You will require the above data when you are entering these assets on the partnership return, later.
Finally, if you claimed "any" vehicle use (I don't think you did) even if it was less than 100% business use, you "must" show the disposition of that vehicle in order to separate it from the SCH C business. The simplest way to do that is to just indicate the vehicle was removed for personal use. Now if your vehicle was less than 100% business use that means you were required to maintain mileage records. Do not lose those records; ever! You will not need your vehicle use records for the partnership return. But you most definitely will need them down the road at sometime in the future when you retire and sell or otherwise dispose of partnership.
At this point once all the above is done you can go ahead and finish the rest of the personal 1040 tax return.
But do not even start your state tax return at this time. I don't know if doing the state return at this time will cause issues or not. Since I'm a total doe-doe on state taxes, I just don't want us to risk that at this time. I know for a fact that for what we're doing now (transferring assets & inventory) the state return doesn't matter. So I see no need to be throwing monkey wrenches around. 🙂
I just found what I was looking for concerning my comment on late filing penalties. In your original post you state:
We have filed an extension for 2018 and I am still trying to get everything organized.
SO with that comment it indicated to me that all this occurred in 2018. SO even with an extension for the 1065 partnership return, the late fees for that return started accumulating on Sept 15th, 2019. I assume you meant to type 2019 in the above. But that's a moot point now.
Thanks so much for your reply! Sorry about the confusion. You are correct, I entered 2018, when it should have read 2019.
I've ordered the TurboTax Business version as you mentioned. I think I understand the rest of your advice, although I may have a few questions as I work through the process.
We own a Salon & Spa. We don't have a lot of inventory (hair products, creams, lotions, etc). I'm a little confused on how to dispose of them on the final filing as a sole proprietor, but I think it will make more sense once I start working through it. I'll also do some reading. I'm not the type to come here and ask for help without first doing some research.
No vehicles are involved, so that should be easy.
We have always take the Section 179 discount on all assets. Hopefully that will make dealing with them a little easier as well.
Thanks again for your help. It's greatly appreciated!
This has been a valuable learning experience. I screwed up several times, but so far have managed to find the mistakes and fix them. I wanted to thank you again for taking the time to leave a detailed description of the process.
I think I am pretty much done, but I'm debating on whether or not I should have an account or tax preparer look it over. I'm pretty good with numbers and pick up things like this fairly quickly, but since this was my first time filing as a partnership, I want to make sure I haven't overlooked anything.
I do have one quick question: If I file an extension, will there be any penalties or fees IF I make sure I overpay the tax amount owed? I know this is the case with personal returns, but could not find the answer searching online.