Change from sole proprieter to LLC

[mly2000]

Last year, wehad a business as a sole proprietorship under my wife.  She was the sole owner. On January 1, 2019, we started an LLC where both she and I are 50/50 owners.  We are still in the same business.  We basically just changed the structure.  So, actually the sole proprietorship ended on 12/31/2018 and the LLC began on 1/1/2019.  My question is as follows:

Last year, the sole proprietorship had an ending inventory.  That inventory was the same amount that we started the LLC with this year.  How do I account for that on TurboTax Business, though?  It doesn't ask about last year's inventory since the LLC just started this year.

[DavidS127]

You get a place to enter beginning inventory in the section Federal Taxes>>Deductions>>Inventory and Cost of Goods Sold.

That inventory from the sole proprietorship was contributed by the partner(s) to the LLC partnership.

[Anonymous]

the inventory transferred as well as any other assets transferred would be treated as capital contributions.   do you realize that now you have a partnership?   since it is an LLC it can not use the qualified joint venture option to avoid filing a partnership return.   the partnership return you needed to file was due 3/15/2020. there was no extension like for individuals. the penalty for filing late is about $200 per partner per month.  so right now if you do nothing you are liable to get a bill from the IRS for about $1,600.   in addition, you need the TT business software to do the return that only can be installed on a PC.  there is no online version.  I strongly suggest you engage the services of a pro who can deal with the first year return and the entries that are needed to be made to ensure the return balances and (s)he can also write a letter with the return kindly asking the IRS to abate the penalties.  After 7/15 the penalties go up another $400.   

[mly2000]

Thank you for your reply. We do have the TT Business software, but I was unaware of the 3/15 deadline.  Do you think that a H&R Block or Jackson Hewitt type service can help with this?

[DawnC]

You can still file using the TurboTax Business software to file your partnership tax return and generate the K-1s you need to file with your personal return.   E-filing (even if late) doesn't end until October.   Those services you mentioned are primarily focused on individual (not business) tax returns so I doubt they would help you anymore than using the Help section within TurboTax Business.   You can always attempt to prepare it yourself since you already have the software.    

If you have issues, questions, or concerns when preparing the return, it would probably serve you better to find a CPA or Business Tax Expert in your area to assist.    You can always ask questions here in this forum too.   

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Filing a Business Tax Return

[mly2000]

Thank you so much for your time and your help.  I have basically finished the business tax return with Turbo Tax Business.  I was just waiting for an answer regarding the inventory.  We have a pretty basic business, so it's not super complicated.  I just worry about that penalty that you mentioned.  Since I basically have it done, I am tempted to just file it myself.  I am just worried about the fact that it is late and the penalty that you mentioned.  How would I go about providing the letter that you mentioned to explain the reason that it is late?  Any ideas?  Thank you.

[mly2000]

There is a line for beginning inventory, but it won't let me put anything there.  I guess it is because it is the first year of business.  If I click on "edit" for beginning inventory, it just bring up the ending inventory for edit.  Could I just add the opening inventory to the merchandise purchased total?  It should accomplish the same thing.

[Anonymous]

basically the letter would say that you just recently became aware that this return has been filed late.  we were under the impression that the due date was the same as for our personal return. that we have taken the following steps to ensure that it won't happen again - lists the steps like marking the 2021 calendar in each month Jan thru March that the business return must be file by 3/15 unless extended. 

maybe also that you put it on the calendar in your cell phones to alert you to filing.   since this is the initial return we request that the late filing penalties be abated

the reason I recommended a pro, is that a pro could look into your need to account for inventories. 

generally use of inventories requires the accrual method of accounting.  this is because if you're using inventory you would want to take into account items you have but haven't yet paid for.  also the accrual method would say you pick up income in the year you make the sale not the year you collect the billing.   many do it wrong and end up with income reported that's a combination of both methods.  so some years they over-report income and other years they under-report.  this is all too common and only presents an issue if the IRS or state audits the return. 

[mly2000]

Thank you again for your reply.  If I file this return electronically via Turbo Tax, how should I send the letter?  Should I just send it separately in the mail?