Tom Talks Taxes - June 19, 2021 - Special Edition
LLC S corporation elections and cryptocurrency like-kind exchanges
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Electing S Corporation Treatment for an LLC, Part 1
It is extremely common for taxpayers to own a limited liability company (LLC). Under the entity classification regulations, the default treatment of a single-member LLC (SMLLC) for federal tax purposes is a disregarded entity, which means the owner reports the tax attributes within the SMLLC on the owner’s tax return. For a multi-member LLC (MMLLC), the default treatment for federal tax purposes is a partnership.
Both a SMLLC and a MMLLC can elect to be an association taxed as a corporation by filing Form 8832, Entity Classification Election, and can further elect S corporation status by filing Form 2553, Election by a Small Business Corporation.
If you plan to advise a client to elect S corporation status for a LLC currently taxed as a disregarded entity or partnership, listed below are important considerations to keep in mind.
File Form 2553 Only. Assuming the taxpayer wants to make both the association taxed as a corporation and S elections effective on the same date, the taxpayer files Form 2553 only to make both elections. There is no need to file a separate Form 8832 per Treas. Reg. §301.7701-3(c)(1)(v)(C).
§351 Tax-Deferred Exchange. Treas. Reg. §301.7701-3(g)(1) states that:
The election to go from a disregarded entity to an association taxed as a corporation has the effect of the owner of the SMLLC contributing all of the assets and liabilities of the SMLLC to the corporation in exchange for stock of the corporation, and
The election to go from a partnership to an association taxed as a corporation has the effect of the MMLLC contributing all of the assets and liabilities of the MMLLC to the corporation in exchange for stock of the corporation, and immediately after, the partnership liquidating by distributing the stock of the corporation to its partners.
Since the 80% control test in §351 is generally met in these circumstances, the election is a §351 tax-deferred exchange. In our next edition, we’ll explain further the tax consequences of the §351 exchange in the LLC election scenario. Here’s a preview: you can’t correctly calculate the initial basis and holding period of the taxpayer’s S corporation stock without applying §351.
§351 Statements. In the tax year that a §351 exchange occurs, both the owner(s) and the LLC itself may have to attach a statement to their tax returns disclosing the §351 exchange. Treas. Reg. §1.351-3(a) provides the required language for a significant transferor (for the owner(s)) and Treas. Reg. §1.351-3(b) provides the required language for the transferee corporation (for the LLC).
A significant transferor is someone who owns at least 1% of the stock after the transfer if the stock is not publicly traded.
Therefore, for a LLC making the S corporation election, individual taxpayers generally have to attach a §351 statement to the Form 1040 return and the LLC generally has to attach a §351 statement to the Form 1120S return.
IRS Says No to Cryptocurrency Like-Kind Exchanges
In Chief Counsel Advice 202124008, the IRS took the position that the following pre-2018 cryptocurrency exchanges are not like-kind for §1031 purposes:
Bitcoin for Ether,
Bitcoin for Litecoin, and
Ether for Litecoin.
This document merely represents the IRS’s legal opinion on the matter; it is not authority to taxpayers under Treas. Reg. §1.6662-4(d)(3)(iii). No taxpayer has litigated this issue in court yet.
Whether or not cryptocurrency exchanges qualify for like-kind treatment is moot for exchanges occurring after December 31, 2017, as the Tax Cuts and Jobs Act limited §1031 tax deferral to real property exchanges after that date.
For an individual taxpayer, the last tax year this position was available was on the 2017 Form 1040. If the taxpayer timely filed the 2017 return, the assessment statute of limitations expires sometime in 2021, depending on the date the taxpayer filed the return in 2018. A six-year statute of limitations due to an omission of gross income exceeding 25% would not apply in this case since proper reporting on Form 8824, Like-Kind Exchanges, would mean the taxpayer sufficiently disclosed the position for purposes of the disclosure exception in §6501(e)(1)(B)(iii).
Upcoming Education Events
Compass Tax Educators, June 24, 2021 - Virtual
AICTP Tax Planning Academy - June 2021 - Virtual
National Association of Enrolled Agents (NAEA) National Tax Practice Institute- July 2021 - Virtual
Level 2: Penalty Abatement Strategies (2 CE); Capstone Course (co-teaching with Clarice Landreth) (2 CE)
Preparing To Practice Before The U.S. Tax Court- July 2021 - Las Vegas, NV
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Update on IRC §199A (2 CE)
California Society of Enrolled Agents - San Gabriel Valley Chapter - August 18, 2021 - Virtual
Commonly Missed Tax Planning Opportunities (3 CE)
AICTP Tax Planning Academy - August 2021 - San Diego, CA