Discussion:LLC Vs General Partnership
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Budrok@Aol.com (talk|edits) said: | 12 January 2006 |
| I have a client who's business is an LLC.It's him and his wife partners, Guaranteed Pay'mts to partners are taxed at SE Taxes on their 1040. The Ordinary income is split between partners. Is that amount also Taxed as SE on their 1040? I'm reading a lot of different things about IRS ruling in this matter. Could someone briefly explain the situation correctly. Thank You. | |
| 12 January 2006 | |
| Only the guaranteed amount is subject to SE tax. What did you read from the IRS? | |
Budrok@Aol.com (talk|edits) said: | 12 January 2006 |
| In the 2005 TheTaxBook It stated An LLC with more than one owner is treated as a partnership by default, unless the LLC elects to be taxed as a Corporation. Memners of an LLC are subject to SE tax on gauaranteed payments, but confusion exists as to whether and when LLC members are suject to SE tax on the distributive share of Income. DZCPA I've even called the IRS, and depends on who you talk to it get different answers. I Appreciate the response, and maybe together we can clear this up. Thanks | |
| 12 January 2006 | |
| Unfortunately, we have no permanent regulations on this issue. However, we do have proposed regulations. The proposed regs basically impose SE tax on any LLC member who works more than 500 hours per year or has the authority to sign contract on behalf of the LLC.
Some practitioners have chosen to ignore the proposed regulations and apply their own criteria for determining whether SE tax should apply. | |
Budrok@Aol.com (talk|edits) said: | 12 January 2006 |
| Thanks Riley2 | |
| 12 January 2006 | |
| I choose to ignore all proposed regulations until they become law. I do not want to make up my own rules. | |
| 13 January 2006 | |
| Limited members who qualify as limited partners are exempt from SE tax unless they draw guaranteed payments. If you don't like the proposed regulations, then consider using your state law definition of a limited partner. In my state of residence, for example, a limited partner who works even just one-hour during the year becomes a general partner. | |
| 20 September 2006 | |
| IRS auditor on a new client used the distributions (guaranteed payments) as SE income on a 2 partner professional LLC. He also suggested that they elect S corporation status, so they did for 2006. | |
Death&Taxes (talk|edits) said: | 20 September 2006 |
| Sorry to go off topic, but does anyone else resent it when agents practice taxes? Watch out, Sheldon, he will probably leave IRS and hang out his shingle and try to recruit your client. On topic, I heard Beanna Whitlock address this question last year. She noted "Under proposed regulations the member may exclude some or all of the income from self-employment earnings if any of the following conditions exists: 1. The member is classified as a limited partner; 2. The member owns more than one class of membership interest; (3)The member bifurcates his distributive share (divide the LLC income between earnings from self-employment and non-earnings from self-employment)." The principle that bifurcating recognizes is that part of the distribution would be a return on capital and not subject to the tax. These notes are from the program book of a seminar given by Beanna in Jamesburg NJ, May 11, 2005. | |
| 20 September 2006 | |
| It is theoretically possible to have a manager managed LLC, treat the other member or members as "limited partners" and not pay the SE tax on net income. I think this is referred to as the "aggressive approach" since the Regs. are up in the air. LOL. If you have partnerships with service providers, attys., architects etc. I think it's safer to follow the proposed regs. | |
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