Treatment of Multi-Member LLC Assets with Section 179 Depreciation Following Dissolution/Close of Business

[LLC2SP]

Our multi-member LLC treated as a partnership was dissolved this year (2022). The LLC bought equipment (depreciable assets) in 2021 that was fully depreciated per section 179. I am trying to find out options for how to report the assets on the final federal return (in the balance sheet and on relevant forms) and whether one of the former LLC members continuing to use the assets avoids a section 179 recapture.

Specifically, I'd appreciate any input/guidance on:

1. Whether the closing of the business:
   • Requires that ending assets (like inventory) be 0 (compared to keeping the assets on the balance sheet and continuing to use them/sell them after dissolution as part of winding down) and
   • Triggers the need to consider a section 179 recapture (does dissolution convert the assets to personal use and does a member using those assets for the same type of business/trade as a sole proprietor change that determination?).
2. If closing equates to essentially a conversion of the assets from business to personal use: 
   • What is put in TurboTax for the % of business use if use was entirely for the business until the LLC was dissolved?
   • This requires filing Form 4797, correct?
   • Does the conversion still happen if the assets are used by an LLC member as a sole proprietor to continue the same type of business (specifically, pursuant to 26 CFR § 1.47–3(f), which covers a mere change in form of conducting a business? If not, is there anything else the SP needs to show?
3. In either case (conversion to personal use triggering section 179 recapture OR continuation), how are the assets covered in the balance sheet? Specifically, are ending assets and depreciation zero (with Form 4797 submitted), or do they keep their value and depreciation, and in what case is each applied?

Thank you!

[Anonymous_]

If you do a search on this board, you will find a few threads that relate to the closing of a multi-member LLC.

@Rick19744 typically answers many of them.

[LLC2SP]

Thanks. I've seen @Rick19744 help with answers, but nothing on this specifically (at least that I've found). It sounds like the assets would need to be treated as converted to personal use and, if so, I know form 4797 needs to be completed, but I'm not sure how to account for it in terms of the amount of 7 year accelerated depreciation through section 179. I also haven't found anything on continuation as a SP and, if that avoids form 4797, how to correctly account for it in TurboTax and on forms.

[Anonymous_]

I am sure @Rick19744 will post a response, but I am also sure he will recommend consulting with a tax professional for this particular matter.

If the LLC is terminating, then obviously a final return (1065) must be filed and the transaction will most probably be treated as a deemed liquidation. 

[Rick19744]

I am going to suggest a one on one due to the fact that a forum such as this isn't optimal for in-depth questions such as this.  I will, however, offer some comments:

• The facts are not real clear.  You indicate the LLC was dissolved, but yet you are asking about what to do with various assets.
• Based on the above, the LLC is not technically dissolved / liquidated for tax purposes at this time. 
• You can dissolve an LLC for state law purposes, but that doesn't necessarily impact your federal tax consequences; or possibly state tax reporting purposes as well
• If the LLC is dissolving (closing) for whatever business purpose, then it needs to liquidate all the assets.
• For federal (and most states will follow federal) tax purposes your LLC is still in existence until you liquidate whatever is left in the LLC and file a final return.
• Yes, your balance sheet should be zero for the final LLC tax return.
• What ever is left inside the LLC needs to either be sold and report the gain at the LLC level, or distribute the assets out to the members.
• Liquidating distributions can get complicated as they take a substituted basis.  In general, there is no gain or loss recognized.  There are some exceptions when the liquidating distribution consists of only cash and/ or inventory.
• The regulations have ordering rules on how to determine the substituted basis of assets received in a liquidating distribution.
• No recapture (section 179) occurs at the time of the liquidating distribution, however, the recapture carries over to the member who receives the property.  Recapture will occur when the member disposes of the property.
• The other big issue is you need to make sure the liquidating distribution is based on each member's ownership if "hot assets" are being distributed in the liquidating process.
• Essentially the answer to your overall question is that you need to have a liquidating distribution of any remaining property which gets reflected on Schedule K-1 box 19 code A or C (not sufficient facts to determine if a code B is applicable).  It doesn't matter how the member will use the property.  Any property received will continue to use the same depreciation method (if applicable) and the holding period of the LLC carries over to the member.
• If assets are distributed out in the liquidating distribution, then in TT you will need to reflect the distribution with no gain or loss at the LLC level.  I am not in a Windows environment so can't speak to how this gets handled within the software.  I believe @Anonymous_ can provide some assistance in this area.
• Another key in this area, is that each member MUST know their tax basis in their LLC interest as this will be critical in determining the basis of any assets received.

[Anonymous_]

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@Rick19744 wrote:

• If assets are distributed out in the liquidating distribution, then in TT you will need to reflect the distribution with no gain or loss at the LLC level.  I am not in a Windows environment so can't speak to how this gets handled within the software.  I believe @Anonymous_ can provide some assistance in this area.

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Frankly, I can only state that this scenario, in particular, would almost certainly require the use of Forms Mode.

Programmatically, Step-by-Step in TurboTax Business is not very well equipped to handle certain scenarios.