In your specific case, yes you have to "close" the sole proprietorship and "open" a completely new single member LLC business.
As far as the IRS is concerned, the only difference between a sole proprietorship and a single member LLC is the spelling. Literally! But since your sole proprietorship and single member LLC have their own individual EIN's now, things aren't as simple for you as they could have been.
So you need to file a final SCH C for the sole proprietorship showing the disposition of "all" assets, inventory and vehicle use (if any). Then you'll start a new business with another SCH C on the same tax return for your single member LLC.
To close the sole proprietorship:
- Select that you closed, sold or otherwise disposed of this business in 2019.
- Continue working it through "as if" nothing changed, reporting all business income and business expenses incurred in the sole proprietorship up to the date of closing/disposition/sale.
Work through business assets selecting that you "stopped using this asset in this business in 2019". You must do this for each individual asset. Also make sure that you're "stop use" date is the same for everything, and it can "NOT" be the day your LLC was open for business, or after. It must be at least one day before the LLC was officially open for business.
Also, write down the following for each individual asset. You will need the information for your 2nd SCH C for the new business.
- The date the business was officially "open for business" (I would expect this to be a prior year, which is fine)
- Date asset was acquired
- Date asset was placed in service (if different from date acquired)
- Total amount of prior year depreciation taken on the asset.
- Total amount of depreciation taken for 2019 on the asset. (This will be pro-rated by the program based on the date you enter that you stopped using the asset in this business)
- Add the above two depreciation amounts together to get the total amount of depreciation taken. You will need this number for the new LLC business.
If your business had an inventory then your EOY Inventory balance "MUST" be zero in order for the IRS to consider the business closed. So if there was any inventory on the close date of this business, indicate that it was "all" removed for personal use. That's the only way to get your EOY Inventory balance to zero without having sold it prior to the business closing.
If you claimed any vehicle use at any time in any year you owned the business, even if the business use was less than 100%, you must show disposition of that vehicle in the Business Vehicle Use section. Simply work it through and indicate the vehicle was removed from the business for personal use. That's it.
When you finish this SCH C entirely, you'll be on a screen that will have a button for "Add Another Business. Just click that button to get started on entering your "new" single member LLC business.
For the "new" business, which is a single member LLC the start date of the business "MUST" be the start date of your now closed single member LLC. If you don't use that date, then you will "NOT" be able to correctly transfer the assets from the sole proprietorship to the LLC. THat's because an assets "in use" date can not be before the business was opened. If you think the in use date will be the day your LLC "really" opened, you'll find that asset depreciation will be "all" "screwed" "up" and that's like hanging out a sign that reads, "HEY! IRS! AUDIT ME NOW! PLEASE! HURRY! QUICK! FAST! I WANT TO PAY LOTS OF FINES AND PENALTIES!"
As you enter each asset, the business use start date must be the same exact date you started using it in the now closed business. Doesn't matter that it may be a prior year either. Enter that original date. Then you'll be asked for prior depreciation already taken. There may already be an amount there, and if it doesn't match your "total depreciation taken" you wrote down for that asset, then make it match. The LLC will then take the remainder of the depreciation for the rest of the 2019 tax year.
For your inventory, your BOY Inventory balance *MUST* be zero. No if's, and's or butt's about it. I'll explain.
Lets say your closed business had 50 widgets valued at $50 ($1 each) on June 30th when you closed it. Since your EOY balance must be zero for you to close that business, you showed the $50 of inventory as removed for personal use.
Now your BOY balance on your LLC "MUST" match exactly your EOY balance on the closed business. So the BOY Inventory balance on the LLC has to be zero. There are no exceptions. But yet, you have 50 widgets? Here's how this will work out, assuming your LLC sells 25 of those widgets.
BOY Inventory Balance - $0
Cost of Goods Sold (COGS) $25
EOY Inventory Balance - $25
See that COGS amount? That's what is deducted from your gross businses income of the LLC. Here's another example for your scenario.
BOY Inventory Balance - $0
COGS - $50
EOY Inventory Balance - $100
The above indicates you started the business with $0 in inventory. Then you purchased $150 of inventory and sold $100 of inventory leaving with your a $50 inventory balance at the end of the year.
What year you purchased it in flat out doesn't matter. Could have been purchased 50 years ago and it doesn't change the fact that you paid $50 for that inventory you purchased 50 years ago.
In fact, 50 years ago you may have purchased 50 widgets for $1 each, and then in 2019 purchased 2 widgets for $50 each. SO if you sold 51 widgets in 2019, that means you sold the original 50 you paid a dollar each for, and one more widget that you paid $50 for.
Remember, when it comes to inventory, it's not the number of widgets you started with, sold or ended with. It's what "YOU" paid for those widgets, regardless of when they were actually purchased.
