[NYSCPA]

To anyone with experience and/or knowledge of such matters I ask the following:

Some background information:

The LLC (X) formed with 5 partners back in 2013. X remained a LLC taxed as a partnership until 2019. Revenue grew steadily year over year and projected income was forecasted in a manner such that by 2019, moving forward, the members/shareholders would benefit from a S Corp Election. Therefore a S Corp classification was elected effective 1/1/2019. 2020 net income drastically decreased and the company has decided to use 2021 to work on expanding business, etc. (i.e. revenue for 2021 will be minimal).

My inquiry is two fold:

1) From my research on this matter:

a) When the S Corp election was made, the LLC elected to be taxed as a C Corp, then immediately made a subsequent election to be taxed as a S Corp. Therefore, by revoking the S Corp election the LLC would then be taxed as a C Corp. Also in the event of the S Corp Revocation and election to be treated as a partnership, this would be treated as the sale of company stock.

b) Because Form 8832 was just filed in 2020 to make the S Corp Election, The LLC can not simply make a “check the box” election to go back to being taxed as a Partnership until 2025/2026.

c) Because of (b) above, the entity would have to distribute assets to a new entity and dissolve. The new entity would then have to apply for a new EIN and move forward filing a 1065 for subsequent years. In addition to this, would the company have to change its name, or could it retain its name and just apply for a new EIN?

Do you have the same understanding for items a-c?

2) One downside of the S Corp election that is being addressed, due to drastic decrease in income, is that the partners reportedly pay/incur a lot of out of pocket (OOP) expenses on behalf of the entity. The company doesn’t have nor do they want to adopt an accountable plan. Therefore, they will lose the benefit of deducting these out of pocket expenses. Would a possible workaround for this be to form a new LLC,, lets call it X Management, LLC. X would then have a contract to pay X Management, LLC a nominal monthly fee for services. The 5 partners of X Management LLC could then deduct their OOP expenses through this entity and subsequently receive a K-1 that would allow them to deduct the OOP expenses they would otherwise lose from the entity currently be taxed as a S Corp?

Thank you all in advance for your responses.

[monikernc]

Do not ask for tax advice on this forum. This forum is for CPA exam candidates who have limited experience and are unlikely to be able to answer a question from a licensed CPA with 12 years experience. Try r/accounting all the Big4 folks hang out in there. Take what you get with a grain of salt.

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BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[NYSCPA]

Thank you for your response. Its funny you answer that way when I prefaced the post with “To anyone with experience and/or knowledge of such matters I ask the following” I know what A71 is. Been around these parts for over a decade. I was going to add “for the older folks” but didn't want to offend anyone… That said, I was hoping to get the likes of you or Recked, Skynet, maybe even Jeff to give a response. I think we are part of the “older” or rather more experienced crowd. Whether it be here or r/accounting, I'm not depending on anyones advice. But if I've learned anything over the last decade 1) Doesn't hurt to ask 2) Doesn't hurt to get another perspectives on things, especially if that individual(s) have experience on the matter at hand.

As an aside. It may be helpful to the young folks to see real world situations that us “older” folks encounter.

[monikernc]

Does your state CPA society have a community forum? That is where I post questions like these when I need real answers.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[Author]

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