Loan, Sale, or Investment

[Vityaba]

Scenario - an IT company ABC Inc (S-Corp) with no real income or product as of the beginning of 2013.

Some time in 2013 they found a company XYZ that agreed to put in a few hundred thousand into ABC company and if they develop a valuable program XYZ will be a 50% owner of that program if not XYZ will loss the money.

So far sound like investment...

At the end of the year it looks like the developed program is a good product and what they decided to do is to form a new LLC with 50% / 50 % ownership by ABC and XYZ. Now the newly formed LLC owns that developed program.

Question - how do I classify a few hundred dollars that XYZ Inc gave ABC Inc?

If I classify that as an investment I'd have to show that XYZ Inc is a 50% owner of ABC inc which is not a case

If I classify that as a loan then later when the developed program ownership is passed to the newly formed LLC would have to be classified as a sale which is not a case either.

It looks like the fact of transferring the program ownership to the LLC triggers a sale/income recognition instead of investment

I'd like to get some input from the community how to better structure this transaction

Thank you

[kcjenkins]

OK,you have me confused. Is it "a few hundred thousand" or is it "a few hundred dollars"?

[jshtax]

Couldn't you just sell it for what they have in it to LLC for no gain and xyz has capital in new business? Trying to throw around ideas that might avoid a taxable issue.

Debit cash credit loans 200k

Debit asset credit cash 200k

Debit cogs credit asset 200k

Debit loan credit income 200k

LLC

Debit asset 200k credit partner 2 capital 200k

[Vityaba]

kcjenkins - it's $XXX,XXX.00

Jshtax, the problem is that ABC Inc has been doing other things during the year and they never separated their expenses based on the related projects. But I like your idea of capitalizing expenditures instead of expensing them. I do not have any experience dealing with IT companies and capitalization rules application. Usually I dealt with construction company where developers would open a new company for each new project in which case it's easy - capitalize until completed and sold. It does not look that easy in this IT company case.

Any recommendations where I can read more information about capitalization vs expensing, specifically related to the IT industry?

As to the proposed entries, what would be a capital account of ABC Inc in the LLC? Zero?

[jshtax]

Let me sleep on this. Just took some nyquil but will be more alert in morning. I like situations like this they allow for brainstorming.

[Vityaba]

Thanks

[jshtax]

In the mean time look up capitalization of software development cost.

http://www.cbiz.com/page.asp?pid=10313

http://resources.mcgladrey.com/Proposed-regulations-released-clarifying-the-treatment-of-prototypes-in-determining-deductible?elq=00000000000000000000000000000000&elqCampaignId=

[Vityaba]

I want to bring this up to see if anyone has any input

Thank you