Corporate Liquidating Distribution for Individual Assets under $2,500 (safe harbor)

[Booking It]

Hi TurboTax!

I was set up as an S Corporation (not an LLC with an S Corp status) and my new CPA informed me that I should just be an LLC with an S Corp election. My CPA said I should do this because there are less requirements like no annual meeting minutes.

My CPA said doing the switch would cause me to dissolve my corporation in the eyes of the IRS and that we'd need to assess the FMV of my assets in order to see if I would have to recognize any capital gains on them. But my company didn't purchase any individual assets over $2,500 during its lifespan and my CPA says that any assets under that amount are just treated as expenses under safe harbor rules.

However, I have assets like this lawn mower I purchased for $600 that is obviously an asset and is currently selling for around $800. In this example, is the $200 difference a capital gain I need to recognize? Or is my CPA correct in saying that my lawn mower is an expense (as it is under $2,500) which is why I can transfer it into my own personal name without recognizing capital gains on it?

I don't doubt my CPA, but I just want to understand why this is and have confidence in it if I am ever audited.

[Critter-3]

Ok ... what a bunch of  dodo (and a way to pad his bill).  What is the big deal  to have one corporate meeting with yourself once a year and document the minutes which can be as short as one minute.  I would NOT change anything at this time ... it is a waste of time and effort.  You can find generic minutes by just googling it if you ever actually need it.... none of my clients over the last 30 years ever has needed them for any reason.  

[Mike9241]

find a new CPA. 

[Booking It]

Is my CPA wrong on advising me that I won't have capital gains on assets expensed under the safe harbor rules? Or are you disagreeing with the advice to switch from an S Corp to an LLC with an S Corp election?

[Critter-3]

Is my CPA wrong on advising me that I won't have capital gains on assets expensed under the safe harbor rules?

You don't have depreciable assets since you deducted the total cost as an expense.  If you sell the item now for more than zero  all of the sales price is simply regular income to the business.

Or are you disagreeing with the advice to switch from an S Corp to an LLC with an S Corp election?  Worse advice ever since they are both exactly the same for federal income tax purposes  so why would you change for no reason ?  

[Booking It]

So you're thinking that those items expensed under safe harbor are still assets sitting on my company's balance sheet for tax purposes? And liquidating my corporation and transferring the items to myself would cause a taxable event? Or is it only taxable if the fair market value of the items are more than what I originally paid for them?

Also, to my CPA's credit, she made me well aware that there would be no change in tax treatment. She was just telling me that I could make the switch to avoid having to complete the corporate formalities. So I am just weighing my options.

[Critter-3]

What corporate formalities ???  Seriously there is absolutely no difference between an S-Corp   and an LLC being taxed as an S-Corp on the federal return.   State issues may be different.    If you do go down that road you have to close the current corp  and  re open in another entity under a different name and EIN ... what a total waste of time.

As to the assets ... since you expensed them they are not and should not have been listed as assets anywhere.   If you actually do sell them the amount you get for them is simply regular business income. 

[Booking It]

Formalities like keeping minutes and record of important business decisions. I also consulted my attorney who confirmed that the move my CPA is proposing would eliminate the need to do those kind formalities. I know it isn't a tax saving strategy; more of a time-saving strategy. I haven't kept minutes in the past, so I know that probably wouldn't keep on top of it in the future either.

And I'll have to ask about the actual resale of those items vs the transfer of them. Thanks Critter-3!