USA Basis Issue when Converting from Single Member LLC to S Corporation

[Leviathan100]

Hello,

I have a question relating to a new client. They currently have a single member LLC and want to convert to an S Corporation. On their 2016 return they will file as a Schedule C and report a loss, therefore giving them a negative basis (even though they do not have to track basis). In 2017 they are going to make the S Election. When the conversion is made to an S corp., will they need to recognize a gain to bring their basis back up to 0? What code section relates to this? Any help is greatly appreciated.

 

[DTA93433]

When making the S-corp election (using Form 2553, Item E - Effective Date of Election): the corporation (or entity eligible to elect to be treated as a corporation) making the election effective for its first tax year in existence should enter the earliest of the following dates: (1) The date the corporation (entity) first had shareholders (owners), (2)
The date the corporation (entity) first had assets, or (3) The date the corporation (entity) began doing business.

In 2016, there is no basis because there is no corporation (when filing Schedule C).

In 2017, beginning basis is $0 for the start of it's first tax year. Basis calculations are based on the date (tax year) the entity began operating as a corporation.