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QUESTION DETAIL
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One of the partners of a 2 member LLC is selling his interest to the other partner. However, the other partner has converted the business to a corporation effective June and filed the request for S Corp status. My question relates to the income tax return for the LLC, which would be for a short year, through June. Specifically, we won't collect the final amount due from one of the customers until July, which is after the LLC was dissolved. Since taxes are on a cash basis, this would close the LLC with this AR item outstanding. What do we do since the S Corporation is on an accural basis of accounting.
ANSWER
The BIDaWIZ Team's Answer:
This is certainly a tricky situation that required some extensive research in previous cases and IRS rulings. The IRS and Tax Courts have generally taken the position that a transfer of a cash basis LLC receivable to an accural basis Corporation can occur if the amount is not significant to the overall assets. How much income is in question here? If it's not significant, then you can use the 6/15 final return date and transfer the receivable. You would report the income when received for the S Corporation.
