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    LLC Memo

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    Company X will have to change from the cash to accrual basis of accounting according to IRS Publication 538. The publication states that a company must use accrual if it fails the gross receipts test, which is average annual gross receipts of $5 million or less over the prior 3 years. When a company changes accounting methods, it must file Form 3115 to properly allocate and amortize the change. The IRS does not explicitly state whether an LLC, LLP, or S corporation can own shares in an existing S corporation. However, regulations indicate S corporations can only have individuals, estates, exempt organizations, or certain trusts as shareholders. Additionally, no part of earnings can benefit private

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    LLC Memo

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    Company X will have to change from the cash to accrual basis of accounting according to IRS Publication 538. The publication states that a company must use accrual if it fails the gross receipts test, which is average annual gross receipts of $5 million or less over the prior 3 years. When a company changes accounting methods, it must file Form 3115 to properly allocate and amortize the change. The IRS does not explicitly state whether an LLC, LLP, or S corporation can own shares in an existing S corporation. However, regulations indicate S corporations can only have individuals, estates, exempt organizations, or certain trusts as shareholders. Additionally, no part of earnings can benefit private

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    Company X will have to change from the cash to accrual basis of accounting according to IRS Publication 538. The publication states that a company must use accrual if it fails the gross receipts test, which is average annual gross receipts of $5 million or less over the prior 3 years. When a company changes accounting methods, it must file Form 3115 to properly allocate and amortize the change. The IRS does not explicitly state whether an LLC, LLP, or S corporation can own shares in an existing S corporation. However, regulations indicate S corporations can only have individuals, estates, exempt organizations, or certain trusts as shareholders. Additionally, no part of earnings can benefit private

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    107 views2 pages

    LLC Memo

    Uploaded by

    api-299644289
    Company X will have to change from the cash to accrual basis of accounting according to IRS Publication 538. The publication states that a company must use accrual if it fails the gross receipts test, which is average annual gross receipts of $5 million or less over the prior 3 years. When a company changes accounting methods, it must file Form 3115 to properly allocate and amortize the change. The IRS does not explicitly state whether an LLC, LLP, or S corporation can own shares in an existing S corporation. However, regulations indicate S corporations can only have individuals, estates, exempt organizations, or certain trusts as shareholders. Additionally, no part of earnings can benefit private

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    TO

    FROM: Peter Staron


    Date 5/13/2015
    Based on the finding Company X will have to change accounting methods to the accrual basis. IRS
    Publication 538 states a corporation or partnership has to use the accrual method if the company fails to
    meet the Gross Receipts test. The IRS defines the Gross receipts test and explains when the company has
    to change methods of accounting as
    Gross receipts test. A corporation or partnership, other than a tax shelter, that meets the gross
    receipts test can generally use the cash method. A corporation or a partnership meets the test if,
    for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or
    less.
    An entity's average annual gross receipts for a prior tax year are determined by:
    1. Adding the gross receipts for that tax year and the 2 preceding tax years; and
    2. Dividing the total by 3.
    Change to accrual method. A corporation or partnership that fails to meet the gross receipts
    test for any tax year is prohibited from using the cash method and must change to an accrual
    method of accounting, effective for the tax year in which the entity fails to meet this test.
    (Publication 538)
    When a company has to change methods in accounting the IRS states that the tax payer has to file Form
    3115 Application for Changes in Accounting Method. In form 3115 Application for Changes in
    Accounting Method it explains how to perform all the proper allocation and amortization.
    Can a LLC, LLP own a S corporation or can the S corporation become a shareholder in a existing s
    corporation?
    The IRS does not specifically state that a LLC, LLP or another S corporation can become a shareholder in
    an existing S corporation. But the IRS states that the S corporations only shareholders are individuals,
    estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in
    section 1361(c)(2)(A).(IRS General Instruction Who May Elect and 26 U.S. Code 1361(b)(1)(b)) .
    When looking at 26 U.S. Code 501 (c) (3) to see if a LLC or LLP would be considered a exempt
    organization it states that no part of the net earnings of which inures to the benefit of any private
    shareholder or individual. The company becoming a shareholder is there to make a profit so it would not
    be an eligible shareholder. The IRS also says that no nonresident alien may be shareholders and the S
    corporation can have only one class of stock. 26 U.S. Code 1361(b) (2) (a) states that an ineligible
    corporation is a financial institution which uses the reserve method of accounting for bad debts described
    in section 585. A venture capital firm may be considered a financial institution in this case. There have
    only been a few cases where a LLC or a LLP could own shares in a S corporation and they are in PLR
    200816002-200816004. But, in all the cases they have been a single-member LLC. Stating this and airing

    on the side of caution it could be concluded that when the LLC, LLP, or S Corporation becomes a
    shareholder of a existing S corporation this would terminate the corporations S election.

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