World Class Mergers & Acquisitions  |  For Companies $5 Million to $100 Million in Revenue

Mergers & Acquisition FAQ – July 2010

Q: I just opened a business and formed it as a Limited Liability Company under my state’s laws.  For federal tax purposes, how do I classify my LLC?

A: An LLC may be classified for federal tax purposes as a sole proprietorship, a partnership, or a corporation.  If the LLC has only one owner, the LLC will automatically be treated as a sole proprietorship unless another election is made by the owner.  On the other hand, if the LLC has two or more owners, it will be classified as a partnership unless an election is made.  The election is made on IRS Form 8832.  Unless the election is made, the classification will be the default classifications.

Q: I am selling rental property which I have owned for many years.  However, I have not taken a depreciation deduction for the property during the time I have owned it. What will my taxes be on this exchange?

A: When selling depreciable property, you are required to recapture and pay ordinary income taxes as required by law on depreciation taken or allowable.  This means that even though you may have not claimed a depreciation deduction (thus paying higher taxes), you must still pay ordinary taxes to some extent in addition to the capital gains taxes due.  To solve the dilemma, the IRS allows you to amend your tax return for up to 3 previous tax years.  If you have not taken depreciation beyond 3 years, taxpayers can file for a change of accounting method to adjust for not taking depreciation on the rental asset.

Q: I would like to set up a Subchapter S Corporation.  How do I do this?

A: You must first file articles of incorporation with your respective state.  Once this is done, IRS Form 2553 must be filled out to make the Subchapter S election.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors