Discussion:CP2000 wants SE Tax on LLC Member's Guaranteed Payments...
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Discussion Forum Index --> Tax Questions --> CP2000 wants SE Tax on LLC Member's Guaranteed Payments...
| 28 June 2007 | |
| even though she was a managing member, who materially participated, and her share of ordinary business loss (-33k) was greater than her guaranteed payment (18k). Her K-1 box 14 Self-employment shows a loss of 15k. Previous accountant did the K-1, but that was my understanding as well. Her GP should be netted against her share of loss, leaving no Self-employment tax.
Or am I wrong? As an aside, I am amazed that the CP2000 picked up the Guaranteed payment amount, as it doesn't show on the return, except maybe on a reconciliation schedule. Any thoughts? Thanks. | |
| 28 June 2007 | |
| I would write the letter to the IRS explaining all that. I would be asking the same question as you are..."or am I wrong?" I don't see any issues here, I think you are right. | |
Death&Taxes (talk|edits) said: | 28 June 2007 |
| And send the K-1 copy too! Sounds like a misposting error at IRS. | |
| 28 June 2007 | |
| Thanks everyone. The day she received it, I did send a nice letter to the IRS, with a copy of the K-1. However, I thought I should post the question here, in case my understanding was wrong. I will let you know what the IRS answers. | |
| June 28, 2007 | |
| Uhhh, excuse me. The IRS is correct. Send the money. The SE tax is due on GP regardless of line 1 income. Or loss. | |
| 28 June 2007 | |
| JR, I'm confused. Line 1 loss is SE loss. Guaranteed pymt of course is SE income. Loss is greater than income. You believe that SE loss related to line 1 is ignored? I did above input in Lacerte, which also came up w/ no SE tax. What am I not understanding? | |
| 28 June 2007 | |
| What we are all not understanding is precise definitions of LLC member income. | |
| June 28, 2007 | |
| Sorry, re-reading another section does say that they should be netted. Perhaps IRS is trying to have cake and eat it to, by not allowing losses in LLC's against SE income, but requiring profits. Or maybe it just got processed as a limited partnership interest or something...or a passive loss? Is the box checked for material participation? | |
| 28 June 2007 | |
| Don't know what the regs say, but lets go back to S corp. If owner is paid salary and has K1 loss, FICA is due on salary. Won't get a FICA refund when you file the return showing line 7 wages and line X loss (not looking at return just now). So, shooting from the hip and thinking logically (do logic and taxes ever go hand in hand?) it makes sense to me that SE tax would be due on GP without regard to losses. | |
| 28 June 2007 | |
| JR1 - Is what box checked for Material Participation? The one in Lacerte K-1 input that says "Not a Passive Activity" is checked. Hence Schedule E netting the two numbers, and no self-employment tax being calculated in Lacerte. | |
| 28 June 2007 | |
| Jdugancpa, I am hoping you are wrong on thinking logically. What about someone who has two schedule C's. One of his businesses is makes 100,000, and one loses 90,000. By your logic, the taxpayer would owe SE Tax on 100,000 profit, and ignore the 90,000 loss? | |
| 28 June 2007 | |
| JR1, Can you point me to the section you were re-reading that says to net them. Thanks. | |
| June 28, 2007 | |
| Reading an EA prep book which distills all the law with no commentary or references, sadly. From NATP. Just figured that if perhaps you hadn't marked the box, then IRS would contend that the loss wasn't part of the SE income. In a usual partnership, you definitely net the two, and I'd contend in an LLC, if he/she's an active member, they should be netted unless you've managed to bifurcate the membership interests into limited and general. | |
| 28 June 2007 | |
| The cite Dennis provided is interesting. Perhaps you need more information. | |
| 28 June 2007 | |
| I read the cite, but it seems to apply to limited partners. Was the box "limited partner" checked on the K-1 in error? | |
| 28 June 2007 | |
| I know you guys don't like cites from Pubs, so sorry about this. This is from Pub 541:
| |
Death&Taxes (talk|edits) said: | 29 June 2007 |
| Something like this happens and something we all take for granted, netting, is suddenly in play. This notice should serve a good purpose, like our recent discussion on self-rentals. | |
| 29 June 2007 | |
| Kevin, I read the cite to mean that for SE purposes, someone might be treated as "limited partner" even if he wasn't for regular tax purposes. Look at ex (iii). B worked over 500 hrs (and therefore is presumably not a limited partner for regular tax purposes) but is for SE tax purposes. | |
| 29 June 2007 | |
| Note that the proposed reg was written in 1997 and more than ten years later is still not final. | |
| 29 June 2007 | |
| And probably will not become final. Congress pretty well scrubbed that proposed reg in section 935 of the Tax Relief Act of 1997. | |
| 29 June 2007 | |
| Kevinh5, The box on the K-1 that was checked is "General partner or LLC member-manager". Reading the proposed regs that Dennis cited, it appears my client is best represented by LLC Member C,and therefore her distributive share would be included in her net earnings from self-employment. And I am hoping that would apply even though her share is a loss. | |
| 29 June 2007 | |
| Those proposed rules may be used as guidelines, but they are not final and not binding. As a result, the IRS must consider state law. Some state allows all members to be limited members. My understanding limited members would not net GMP with residue profit or loss. Look to the state law for input. | |
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