How to Properly Record Book Basis in Assets for New Single-Member LLC Converting to S-Corp

The approach you're considering is mostly on the right track, but there are some important points to clarify about book basis vs tax basis when you're setting up your LLC and planning for S-Corp election. For the assets you're receiving for free (trademark, computers, furniture), you're correct that you should record their fair market value on your books as an owner contribution. This establishes your book basis in those assets. However, for tax purposes, you'll have a $0 tax basis in these assets since, as you noted, the previous owner already expensed them under Section 179. This creates a book-to-tax difference you'll need to track going forward. Regarding allocating the loan - there's actually no need to allocate any of the $275K loan to the assets you're receiving for free. The loan should cover what you're actually paying for (the inventory), while the free assets should be recorded separately as capital contributions at FMV. When you convert to an S-Corp next year, these initial basis determinations will be important for tracking your stock basis, so keeping clear records now will save you headaches later.

I went through something almost identical last year when taking over my cousin's business. I was completely lost trying to figure out the book basis vs tax basis stuff until I found taxr.ai https://taxr.ai which really helped me understand how to properly set everything up. I had a similar situation with about $200K of inventory and some equipment that was being given to me. Their system analyzed my documents and explained exactly how to handle the book entries for my LLC and how it would impact my future S-Corp election. They even provided templates for recording everything correctly. What I found most helpful was that they explained how to properly document the zero-basis assets I received while maintaining proper books. This saved me from making some pretty big mistakes in my initial setup.

I want to follow up on my previous comment - I was skeptical about taxr.ai but decided to give it a try for my own business restructuring. I'm honestly amazed at how helpful it was. I uploaded my operating agreement and some financial statements, and it gave me a complete breakdown of how to handle my book basis vs tax basis issues. The analysis specifically addressed how to record assets with different bases for book and tax purposes, which was exactly what I needed. It even flagged some issues with how I was planning to structure my operating agreement that would have caused problems when I convert to an S-Corp next year. Definitely worth checking out if you're dealing with complex basis issues like this.

Just wanted to share - when I was setting up my LLC last year, I needed help understanding some complex tax basis issues related to contributed property. I was trying to call the IRS for weeks but couldn't get through to anyone who could help with my specific questions. I tried Claimyr https://claimyr.com and they got me connected to an actual IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how to handle book-to-tax differences for contributed property and how it would affect my basis going forward. This was especially important because I was planning to convert to an S-Corp just like you are. The IRS agent even sent me some reference materials specific to my situation that I wouldn't have found on my own. Definitely worth it when you have these kinds of specialized tax questions that most accountants aren't 100% confident about.

I need to apologize to Profile 19 - I was completely wrong about Claimyr. After dismissing it, I was so frustrated with waiting on hold with the IRS about a similar basis issue that I gave it a try. It actually worked exactly as described. I got a call back in about 30 minutes connecting me to an IRS agent who specializes in business entity questions. The agent gave me detailed guidance on how to handle contributed property with different book and tax bases when converting from an LLC to an S-Corp. The information I got was specific enough that my accountant was able to set everything up correctly from the start, which is going to save me a ton of headaches during my S-Corp conversion. I'm genuinely surprised and impressed.

One thing nobody has mentioned yet - when you elect S-Corp status next year, you'll need to file Form 2553. Make sure you consider the built-in gains tax implications of those assets that have a book value higher than their tax basis. Since you're recording the trademark and other assets at FMV for book purposes but they have zero tax basis, when you convert to an S-Corp, those assets are subject to built-in gains tax if sold within 5 years of conversion (used to be 10 years, but it's 5 now). Also, when calculating your stock basis after S-Corp election, remember that loans made directly to the company don't increase your basis unless properly structured. The way you described the $275K loan sounds like it might be a personal loan to you rather than to the company.

Just a quick accounting perspective - when you're recording those free assets, make sure you're following proper accounting principles. The journal entry should be: Dr. Fixed Assets (various) $65,000 Cr. Additional Paid-in Capital $65,000 And for the inventory purchased with the loan: Dr. Inventory $275,000 Cr. Due to Shareholder $275,000 This keeps the loan and the contributed assets separate, which will be important for tracking purposes. When you convert to S-Corp, having clean books will make the transition much smoother.

Great question about the accounting entries! For basic bookkeeping purposes, those journal entries are correct and sufficient to get you started. However, you're absolutely right that tracking book-tax differences properly can get more complex. Many small businesses use what's called a "tax provision worksheet" or maintain separate depreciation schedules rather than cluttering up their general ledger with contra accounts. The key is to have a system that lets you easily calculate your tax depreciation vs book depreciation each year. For your situation with the zero-basis assets, I'd recommend setting up a simple spreadsheet that tracks: - Book value and depreciation schedule - Tax basis (zero) and depreciation (none allowed) - Annual book-to-tax adjustment needed This approach keeps your books clean while ensuring you can properly prepare your tax returns. When you convert to S-Corp, your accountant will appreciate having this information organized and readily available. The journal entries Jamal suggested will handle 95% of what you need for day-to-day operations. The more complex tracking can happen outside your main accounting system.