Which form should we use? Multi-member LLC electing C-corp tax status

[Sang123]

What form should we choose to prepare a new return using TurboTax Business if we are Multi-member LLC but has file form 8832 to elect C-Corp tax status? Do we choose form 1065 and it will have an area in the form to specify that we already elect C-Corp tax status with the IRS or do we just use form 1120 for C-Corp? 

Also, when we change our tax status from an LLC to a C-corp, do we have to liquidate all of our assets and be taxed by their gain and loss?

[Anonymous_]

You should engage competent legal counsel and a tax professional.

With respect to which form to file, you would file Form 1120 if the election was to treat the entity as a C corporation for federal income tax purposes.

Generally, when property is contributed to an entity (such as a corporation), and those contributing property to the entity are in control of the entity immediately after the transfer, then the transfer is tax free,

Again, legal counsel and professional tax guidance is highly recommended. 

[Critter-3]

Agreed ... seek local professional assistance especially if this was a 1065 partnership and you are changing to a C-Corp ... the conversion needs to be done correctly.  The penalties for doing it wrong can be considerable. 

[Sang123]

Hi all,

Thanks for the quick response. I did seek local professionals but I just want to get more opinions from other people as well to be sure. Again, this is simply a reclassification of tax status with the IRS from the default status of an LLC to a C-corp. This is NOT a formal and full conversion from an LLC to a C-corp.  The only thing that we use our LLC for is for holding our Securities(stock & bonds) and the only income from those is dividends.  I guess I just want to make sure that there are no rules out there that would require us to liquidate all of our stock & bonds holding when we simply seek reclassification of our tax status. Basically, we don't want those dividends to "flow-through" our personal taxes. 

[Rick19744]

Agree with the other responses; you should have a one on one discussion with a tax professional. 

Having said that, a key piece of information has not been provided; was the check the box election made at inception or was the multi-member LLC entity structure in place and in business and then you changed your entity type?

[Sang123]

I totally understand this "*A reminder that posts in a forum such as this do not constitute tax advice.*"

At the inception, we just went with the default tax classification of the Multi-member LLC. But now we want to take advantage of the C-Corp tax structure without having to formally convert our LLC to a C-Corp. 

[Critter-3]

What you want and what is allowed may be totally different ... go back to the local tax pros for advice instead of looking for legal advice from a nameless faceless public forum who doesn't have all the facts. 

[Rick19744]

Based on your follow-up response:

1. Since you were originally a multi-member LLC that is now electing to be a C corporation by filing form 8832, you will need to file a final form 1065 and all assets in the LLC will be reflected as a liquidating distribution to the members.
2. Depending on what is in the LLC, there is a 5 step process in determining the basis of the assets distributed to the members in liquidation.
3. Hopefully all members have maintained their tax basis in their LLC interest as this will be key when determining the basis of the assets received in liquidation.
4. Appears you may have marketable securities which needs to be considered in the 5 step process noted above.
5. You should receive notification from the IRS regarding the acceptance or denial of the entity change on form 8832.  You need to make sure you have this before filing any C corp return.

[Sang123]

Hi Champ, 

That's what I was trying to clarify. Liquidation and paying capital gain on all of our current assets just because we want to change our way of paying tax is not what we want to do. I really appreciate your insight and "opinion" 🙂

[Rick19744]

You need to consult with a tax profession for a one on one.

You may not owe any tax on the liquidation, but you have to run the numbers.

A partnership is a hybrid of aggregate theory and entity theory.  The liquidating distributions are the aggregate theory camp.

Depending on the member tax basis and the assets being liquidated, there is a good chance of no gain and no tax, but as noted above, you have to run the numbers based on the steps provided in the regulations.

[Sang123]

Hi Champ, thanks for the insight, I'll check up on it more with local professionals. 

[Sang123]

Hi Champ,

Sorry to bother you again.  As you mentioned above that "you will need to file a final form 1065 and all assets in the LLC will be reflected as a liquidating distribution to the members." I've been using TurboTax all my life and is this something thing that I can use Turbotax to do (the final form 1065), to run a test scenario?  OF COURSE, I'll be consulting with the more local tax professionals because I can't afford to make mistakes on things like this. However, I like to know as much as possible before I talk to them so I can understand them better. 

[Anonymous_]

@Sang123 

TurboTax Business can be used to file a final 1065 along with K-1s for each of your LLC members, but it will not be of much use for basis (and valuation) calculations nor balance sheet preparation.

[Sang123]

got it. thank you!