- This topic has 3 replies, 2 voices, and was last updated 2 years, 7 months ago by .
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.
- You must be logged in to reply to this topic.