My wife closed down her business, reincorporated then started a new business that was able to use most of the assets from the original business. I'm assuming that means a new schedule C but am wondering about the TurboTax mechanics of transferring assets from one schedule C to another.
Some of the assets had section 179 elections and are within their depreciable life.
Any suggestions as to how to handle this best in Turbotax?
Thanks.
Mike
Hi, Mike.
If you have not misstated your wife's situation, then you are in dire need of some professional tax advice!
The words "reincorporated" and "Schedule C" do not go together; they are mutually exclusive. An individual who owns a sole proprietorship business reports income and expenses of that business on Schedule C attached to her Form 1040, Individual Income Tax Return. An individual who owns stock in a corporation, even if she is the sole shareholder, does not use Schedule C to report income from a business conducted by that corporation. A corporation is "a person" created by the State; it has title to its own assets, may carry on a business, and reports income and expenses of that business on its Form 1120, Corporation Income Tax Return - and pays its own taxes. (The Supreme Court's recent decision on political contributions made by corporations reaffirmed the concept that a corporation is a person, separate and distinct from its owners.)
There are several special kinds of corporation, such as LLCs and Subchapter S corporations, and these have different rules and special tax forms. Sub S corporations allocate their income to their shareholders, who report such income on their own Forms 1040, but the income is reported first on the corporate return.
An individual can transfer assets from one sole proprietorship to another quite simply. Ownership of the assets does not change; their tax basis in the taxpayer's hands does not change; neither does the accumulated depreciation and other tax attributes of each asset. The assets simply move from the taxpayer's left pocket to the same taxpayer's right pocket. And from the depreciation schedule for the taxpayer's Schedule C for "My FIRST Business" to the Schedule C for "My SECOND Business".
But the situation is VERY different for assets transferred from an individual into or out of a corporation, even if that corporation is wholly-owned by that individual. Generally speaking, it's pretty simple for an individual to transfer assets into a corporation, but VERY complicated to transfer those same assets out of the corporation - and it makes a big difference if the assets are transferred to the individual or to another corporation, even if the two corporations are owned identically.
The very innocent acts of transferring assets from your wife into her own corporation, and then transferring those same assets back to herself or to another of her corporations, can trigger significant tax liabilities. The IRS is not terribly interested in how you handle these things in Quicken or TurboTax. But they are very interested in what you report on - or omit from - your tax returns.
That's why it is very important that you get competent tax advice before your wife takes even the first step in her plan!
As I remind readers here often, I've been retired for nearly 2 decades, Mike, and tax rules change constantly, so I am not competent to advise you in this matter. But I strongly urge you to consult with a tax attorney or CPA before making any moves.
RC
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