It's rather simple really. First, you will close the sole proprietorship permanently and forever on Dec 31, 2019. Then the S-Corp will be "open for business" on Jan 1, 2020. So the only thing you wll be dealing with on your 2019 tax return will be the closure of the sole proprietorship, and that's it. You won't be dealing with the S-Corp stuff on a tax return "at all" until 2021 when you will be filing your first 1120-S Corporate tax return.  So first I'm going to cover what you will "have" to do to close the sole proprietorship SCH C business on your 2019 tax return so that you can "transfer" assets to the S-Corp when you file the 1120-S a year later. I'll cover "briefly" how you'll deal with it on that 1120-S you'll be filing in 2021.

Closing the sole proprietorship

 First, as you start working through the SCH C business in TurboTax, about 2-3 screens in click the checkbox for "I sold or otherwise disposed of this business in 2019" and then press on "as if" nothing changed and you still own it. You will report and claim all business income earned, as well as all business expenses paid in 2019. Then you get to the business assets.

You must work through each individual asset one at a time. You'll have a screen for "I stopped using this asset in 2019" and on that screen you'll click YES to indicate that you did stop using it in the business. The disposition date of the asset will be Dec 31, 2019. When asked "Special handling required?" you *MUST* answer that question YES. If you answer NO, then you will be "FORCED" to enter a sales price and other sales information. YOu did not sell the asset. You are indicating that you removed the asset from the sole proprietorship for personal use, on Dec 31, 2019. That date will be your "disposition date" when you are asked for that.

Take note that you must do the above paragraph for each and every asset listed in the business assets section. Even if that asset is already fully depreciated, you *have* to do this.

Now if you claimed any vehicle use in your sole proprietorship, even if that busines use was less than 100%, you must also show disposition of the vehicle. It doesn't matter if you plan to transfer ownership of the vehicle to the S-Corp or not. Until you show the disposition of *ALL* assets in the sole proprietorship including vehicles, the sole proprietorship is *not* closed.

Now, once you have completed the 2019 tax return in it's entirety *and* it has been accepted by the IRS (assuming you elect to e-file it) then it's *extremely* *important* that you print that tax return in it's entirety. I don't mean just the "forms required for filing" or the "forms to keep for your records" either. I mean *absolutely * *everything*.  More than likely the printout will exceed 100 pages quite easily. This printout of everything will include all tax forms, calculation forms and worksheets. You will "NEED" this detailed information when you complete your first 1120-S corporate return.

Generally, for someone's first year owning a corporation of any type (C-Corp or S-Corp) we "HIGHLY" recommend seeking professional help for at least that first year. I still advise that now. So weather you attempt to tackle that first year on your own or seek professional help, either you or the professional helping you will "NEED" that complete printout of your 2019 return. If you don't have it, or are unable to provide it, you risk finding yourself in a never-ending nightmare with the IRS from which you will never awaken.

Before we get to the initial S-Corp filing, are you with me so far? Taking my time here so as to avoid "information overload".

That was quite helpful.  I had already taken a 179 deduction on all my assets, which I'm hoping will make things a little easier.  I had no vehicles used in the business either.  I went ahead and closed out all the assets on my SCH C as you advised.  I am now ready to work on my 1120-S.  Please advise on the next steps.

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@yesngo wrote:

Please advise on the next steps.

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Your FIRST step should have been to go to a tax professional BEFORE you even started the corporation.  Seriously, go to a tax professional.

Yes, I am late in filing due to pandemic related issues, but I estimate I have paid more than what is due when I filed my extensions, so I'm not expecting too much of a penalty, if any.  All the other aspects of the S-Corp are set in terms of reasonable salary, state filings, articles, WC, etc.  And I apologize for mispeaking about the 179 deduction.  I meant I took the bonus depreciation.  I'm mainly trying to figure out this first year transfer, and whether some or all of those assets should be included when establishing basis in the S-Corp.

Yes, I should be going to a tax professional.  It's just I've been doing my own taxes for the past 25 years (which included a full audit with no errors found), so old habits die hard.  I guess I feel better about entering in every expense and income form myself rather than dropping off all my receipts and 1099s, and hoping they'll all be entered correctly.  I've had a couple of friends who have had issues with errors on their taxes prepared by their professionals (and their taxes are relatively simple).  I try to keep up with the tax code, and even had to manually enter in an HSA deduction manually when they were first introduced because Turbotax didn't include it in their interview at the time. 

If you think it's too complicated and I'm in over my head, I will seek out a pro.  Of course, I'll just be back to my old ways of doing it myself once this first year issue of establishing basis is taken care of.  Thanks.

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@yesngo wrote:

Yes, I am late in filing due to pandemic related issues, but I estimate I have paid more than what is due when I filed my extensions, so I'm not expecting too much of a penalty, if any. 

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You might ask for (and receive) relief from penalties, but there is a late filing penalty for an S corporation even if no tax is due.

For returns on which no tax is due, the penalty is $205 for each month or part of a month (up to 12 months) the return is late or doesn't include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year for which the return is due.

See https://www.irs.gov/instructions/i1120s#idm139641016304688

Thanks for the advice on establishing basis and the filing penalty.  They are appreciated.  In actuality, I was a little confused, thinking my usual 6 month extension would apply from the new July 15 date they had set (minus 1 month for the Corp, of course).  By the time I had realized this was not the case, it was too late to get all my stuff together.  Definitely worth a try asking for forgiveness, like you said.  Maybe someone will have mercy on my ignorance.