Category: LLC Taxation

LLCS AS S CORPORATIONS

By , October 17, 2017 7:06 pm

Under the link to the post below is a brief but useful discussion of why multi-member LLCs might want to elect to be S corporations for federal tax purposes.  However, the post fails to mention Prop. Reg. § 1.1402(a)-2 or to address the key practical importance of that propose reg. (which sets forth the IRS’s audit guidelines for determining the SET liability of members of multi-member LLCs).

Here’s the link: http://www.taxlawforchb.com/2017/08/s-corporation-status-for-an-llc/

NEW HAMPSHIRE TAXES

By , October 10, 2017 3:29 pm

Those of you who follow New Hampshire taxes will want to read New Hampshire Department of Revenue Administration Technical Information Release TIR 2017-004, which summarizes New Hampshire state tax changes enacted in the 2017 New Hampshire legislative session.  Here’s the link:

https://www.revenue.nh.gov/tirs/documents/2017-004.pdf

WHEN IS A PARTNER ACTING LIKE A PARTNER?

By , September 27, 2017 5:21 pm

Most multi-member LLCs are taxable as partnerships, and all members of these LLCs are taxable as partners in their capacity as partners.  A basic partnership tax issue is the issue of when partners are not acting in their capacity and thus may not be taxable as partners; and when they are not.  This very common partnership tax issue is dealt with in the post under the link below:

http://www.taxlawforchb.com/2017/08/when-a-partner-may-not-be-acting-as-a-partner/

SINGLE-MEMBER LLCS

By , September 5, 2017 2:13 pm

Roughly 70% of all LLCs are single-member LLCs whose members are individuals.  Thus, single-member LLCs are central to any LLC practice.  You literally can’t know too much about them.  Below are a citation to and the introductory paragraphs of an important law journal article about single-member LLCs:

36 Va. Tax Rev. 323
Virginia Tax Review
Spring, 2017
Article
Philip Manns, Jr., Timothy M. Todd
Copyright © 2017 by The Virginia Tax Review Association; F. Philip Manns, Jr., Timothy M. Todd
THE TAX LIFECYCLE OF A SINGLE-MEMBER LLC

The single-member LLC (SMLLC) is ubiquitous. Despite its ubiquity, the Internal Revenue Code (Code) does not squarely address its tax consequences nor even contemplate its existence. This article examines the tax lifecycle of an SMLLC through its formation, operation, and exit event (e.g., sale, gift, or deathtime transfer).

This article identifies and isolates a tax asymmetry that arises from the U.S. Tax Court’s decision in Pierre v. Commissioner. Despite the check-the-box regulations, which disregard the SMLLC, Pierre regards the SMLLC for federal gift tax purposes. This asymmetry has several tax consequences, including a potential prophylactic immunization of transfers to SMLLCs against application of section 2036–which claws back into the federal gross estate transfers when the transferor retains an interest–in the family partnership context.

Consequently, this article demonstrates that the SMLLC can be used to blunt the negative effects of section 2512 (a gift tax provision), section 1015 (an income tax provision), and section 2036 (an estate tax provision). In effect, due to the Pierre asymmetry, the SMLLC is the ideal initial entity in a gifting strategy.

NH TAXES

By , August 30, 2017 2:08 pm

For those interested in New Hampshire taxation:

2017 Business Tax Law Changes

TECHNICAL INFORMATION RELEASE

Date July 21, 2017

A Technical Information Release is designed to provide immediate information regarding tax laws administered by the Department or the policy positions of the Department as a service to taxpayers and practitioners. A Technical Information Release represents the position of the Department on the limited issues discussed herein based on current law and Department interpretation. For the current status of any tax law, practitioners and taxpayers should consult the source documents (i.e., Revised Statutes Annotated, Rules, Case Law, Session Laws, etc.). Questions should be directed to Taxpayer Services at (603) 230-5920.

 The purpose of this Technical Information Release (TIR) is to provide taxpayers and tax practitioners with a convenient reference guide to several of the major Business Profits Tax (BPT) and Business Enterprise Tax (BET) (collectively “Business Tax”) law changes that were made during the 2017 Legislative Session by the New Hampshire General Court. This TIR is for informational purposes only and is intended to provide a summary or synopsis of enacted legislation. It is not intended to be relied upon as full and complete text or as a substitute for the actual state law. Please refer to the applicable statute and rules to determine how this information applies to specific persons or situations.

BUSINESS TAX RATE REDUCTIONS

House Bill 517 (Chapter 156, Sections 213-217, Laws of 2017) reduces the rate of the RSA 77-A BPT and the RSA 77-E BET.

For taxable periods ending on or after December 31, 2019, HB 517 reduces the BPT rate to 7.7% and the BET rate to .6%.

For taxable periods ending on or after December 31, 2021, HB 517 reduces the BPT rate to 7.5% and the BET rate to .5%.

Pursuant to existing law, for taxable periods ending on or after December 31, 2018, the BPT rate is reduced to 7.9% and the BET rate is reduced to .675%, contingent upon combined unrestricted general and education trust fund revenues of $4.64 billion being collected during the biennium ending June 30, 2017 as reported in the audited comprehensive annual financial report performed pursuant to RSA 21-I:8, II(a). On or about December 31, 2017, the Legislative Budget Assistant will report on whether revenue collections have met the threshold. The Department will issue an additional Technical Information Release at that time advising taxpayers of the applicable BPT and BET rate for taxable periods ending on or after December 31, 2018. However, based upon preliminary unaudited revenue figures, the $4.64 billion dollar threshold set forth in RSA 77-A:2, IV and RSA 77-E:2, IV appears likely to have been met.

For taxable periods ending on or after December 31, 2016, the BPT rate is 8.2% and the BET rate is .72%.

INTERNAL REVENUE CODE § 179 DEDUCTION

House Bill 517 (Chapter 156, Section 218, Laws of 2017) amends RSA 77-A:3-a to provide that a taxpayer may calculate expense deductions pursuant to Internal Revenue Code (IRC) § 179 not to exceed $500,000 for property placed in service on or after January 1, 2018. For property placed in service from January 1, 2017 through December 31, 2017, the maximum IRC § 179 deduction is $100,000. For property placed in service prior to January 1, 2017, the maximum IRC § 179 deduction is $25,000.

INTERNAL REVENUE CODE CONFORMITY

House Bill 517 (Chapter 156, Section 229, Laws of 2017) amends RSA 77-A:1, XX to conform the BPT to the IRC of 1986 in effect on December 31, 2016 for taxable periods beginning on or after January 1, 2018, subject to the adjustments required pursuant to RSA 77-A:3-b. To determine the IRC applicable to taxable periods beginning prior to January 1, 2018, please reference RSA 77-A:1, XX.

Additional information about the BPT can be obtained by referencing RSA 77-A and N.H. Code of Admin. Rules, Rev 300 and additional information about the BET can be obtained by referencing RSA 77-E and N.H. Code of Admin. Rules, Rev 2400, which can both be accessed on the Department’s website.

Individuals who need auxiliary aids for effective communication in programs and services of the Department of Revenue Administration are invited to make their needs and preferences known to the N.H. Department of Revenue Administration, 109 Pleasant Street, Concord, NH 03301 or by contacting them at (603) 230-5000.

NEW HAMPSHIRE TAX

By , August 10, 2017 1:56 pm

For those of you who are interested in New Hampshire state tax:  The new ruling of the New Hampshire Department of Revenue Administration set forth below rules that a merger of three multi-member LLCs with identical memberships is subject to the NH Real Estate Transfer Tax.  To me, the ruling seems harsh and legalistic.  Furthermore, I suspect the LLCs could have gotten to where they need to go by transfers of the relevant real properties by two of the LLCs to the third.  But maybe life isn’t that simple.

Here, in quotes, is the text of the ruling:

IN THE MATTER OF THE PETITION OF
Member 1 and Member 2

STATE OF NEW HAMPSHIRE
DEPARTMENT OF REVENUE ADMINISTRATION

FOR A DECLARATORY RULING

REDACTED DOCUMENT

Effective 6-8-2017

Pursuant to RSA 541-A:1, V and RSA 541-A:16, II(b) and N.H. Code of Admin. Rules Rev 209.01, the Petitioners request a declaratory ruling with respect to real estate transfer tax.

Pursuant to N.H. Code of Admin. Rules Rev 209.02, this declaratory ruling is issued to the Petitioners with respect to the particular circumstances and facts discussed herein and represents a holding of the department on those circumstances and facts for Petitioners only.

FACTS PRESENTED BY THE PETITIONERS

ABC, LLC, DEF, LLC, and GHI, LLC (collectively, the “Companies”) are each multi-member New Hampshire limited liability companies with a principal business address located in New Hampshire. Member 1 and Member 2 (the “Petitioners”) are the only members of the Companies and each has a 50% membership interest in each Company. Each Company meets the definition of a “real estate holding company” pursuant to RSA 78-B:1-a, VI.

ABC, LLC owns multiple rental properties and there are mortgages on several of these properties. DEF, LLC owns multiple rental properties and there are mortgages on at least some of these properties. GHI, LLC owns one property.

In order to streamline management, reduce paperwork, and simplify filings, the Petitioners seek to merge the Companies into one limited liability company. The Petitioners represent that DEF, LLC and GHI, LLC will merge into ABC, LLC pursuant to RSA 304-C:155 (Mergers of Limited Liability Companies with Other Business Entities). The Petitioners further represent that:

  1. Petitioners will submit all necessary statutory documents to effectuate the merger.
  2. ABC, LLC will be the surviving limited liability company.
  3. Immediately following the merger, the Petitioners will hold all of the membership interests in ABC, LLC in the same percentage as existed pre-merger (Member 1, 50% and Member 2, 50%).
  4. The members of ABC, LLC will receive no consideration for the merger of their interests in DEF, LLC and GHI, LLC into ABC, LLC.
  5. The combined assets and liabilities of the Companies before the merger will be the same as all of the assets and liabilities of ABC, LLC after the merger.

DETERMINATION REQUESTED BY THE PETITIONERS

Petitioners request the following ruling:

The merger of DEF, LLC and GHI, LLC into ABC, LLC, under the provisions of RSA 304-C:155, shall not create a taxable transfer of the real estate owned by DEF, LLC or GHI, LLC for purposes of the real estate transfer tax, as the tax does not apply pursuant to RSA 78-B:2.

REVISED STATUTES ANNOTATED (RSA) AT ISSUE

The following New Hampshire statutes are relevant to the Petitioners’ request for a declaratory ruling:

RSA 78-B:1, I (1999)

RSA 78-B:2 (2016)

RSA 304-C:155 (2013)

OTHER LAWS OR RULES

N.H. Code of Admin. Rules Rev 209.01

N.H. Code of Admin. Rules Rev 209.02

PETITIONERS’ REPRESENTATIONS

To the best of the Petitioners’ knowledge, the issue and the particular circumstances which are the subject of the petition:

  1. Are not under examination by the Department;
  2. Have not been examined by the Department;
  3. Are not under consideration by the Department in connection with a return of a prior period; and
  4. Are not pending in litigation.

DISCUSSION

  1. Real Estate Transfer Tax

Pursuant to RSA 78-B:1, I(a), the RETT is “[a] tax . . . imposed upon the sale, granting and transfer of real estate and any interest therein including transfers by operation of law.” Further, each sale, granting and transfer of real estate, and each sale, granting and transfer of an interest in real estate “shall be presumed taxable unless it is specifically exempt from taxation under RSA 78-B:2.” RSA 78-B:1, I(a).

Petitioners represent that the Companies are each multi-member New Hampshire limited liability companies. The Petitioners further represent that they are the only members of the Companies, and each Petitioner has a 50% membership interest in each Company. According to the petition, the Companies will be merged into one limited liability company pursuant to RSA 304-C:155 in order to streamline management, reduce paperwork, and simplify filings. Immediately following the merger, the Petitioners will hold all of the membership interests in the surviving entity in the same percentage as existed pre-merger. The surviving entity, ABC, LLC, will not only retain its pre-merger assets and liabilities, but after the merger will also possess the assets and liabilities that were formerly held by DEF, LLC and GHI, LLC.

The Petitioners seek a ruling that the merger of the Companies is exempt from RETT under RSA 78-B:2, without specifying which of the exceptions described in that section they believe applies to the merger. However, every sale, granting and transfer is “presumed taxable unless it is specifically exempt from taxation under RSA 78-B:2.” RSA 78-B:1, I(a).

A previously existing exception listed in RSA 78-B:2, which has since been repealed, specifically exempted certain mergers from RETT. In 1992, the New Hampshire legislature adopted and the governor signed Chapter 203:2 into law, which amended the RETT statute by inserting RSA 78-B:2, XIV. This paragraph added an exemption from RETT covering “a transfer of title pursuant to a merger, consolidation or other reorganization qualifying as a tax-free reorganization as defined under the United States Internal Revenue Code of 1986, section 368, as amended.”

The exemption provided by paragraph XIV was repealed when the legislature adopted Chapter 158:27 in 2001, and has not been reenacted since. Additionally, none of the remaining exceptions in RSA 78-B:2 “specifically exempt,” as required by RSA 78-B:1, I(a), the merger of multiple entities with identical ownership. As none of the exceptions in RSA 78-B:2 specifically exempt transactions such as the Petitioners’, the merger described in the petition is not exempt from RETT under RSA 78-B:2.

RULING

Based on the facts represented by the Petitioners, as well as the statutory and regulatory provisions discussed above, the Department makes the following ruling:

The merger of DEF, LLC and GHI, LLC into ABC, LLC, under the provisions of RSA 304-C:155, are not exempt under RSA 78-B:2 from the real estate transfer tax.

Date

John T. Beardmore, Commissioner”

SALE OF CONTRACT RIGHTS

By , August 1, 2017 1:23 pm

If your client is a business owner who, individually or through his business, owns valuable contract rights and has an opportunity to sell those rights to a third party, when can he or she treat income from such a sale as capital gains?  Under the link below is a blog that provides a brief but excellent discussion of this difficult question.

Here’s the link:

http://www.taxlawforchb.com/2017/07/sale-of-a-contract-capital-gain-or-ordinary-income/

NEW HAMPSHIRE TAX DEVELOPMENTS

By , July 19, 2017 1:14 pm

For those interested in New Hampshire state taxation, the following update from CCH will be of interest:

—————————–

S.10,New Hampshire—Corporate Income, Utilities Taxes: Correction: IRC Conformity Updated and BPT/BET Rates Reduced,(Jul. 12, 2017)

Governor Sununu of New Hampshire has approved legislation that reduces the tax rates of the business profits tax and the business enterprise tax, updates the state’s conformity with the Internal Revenue Code, increases the IRC Sec. 179 deduction limit, and repeals the electricity consumption tax. The legislation reduces in two steps the business profits tax and the business enterprise tax rates. The business profits tax will be imposed at the rate of 7.7% on the taxable business profits of every business organization for tax periods ending on or after December 31, 2019 and at the rate of 7.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 8.2%. The rate is scheduled to be reduced to 7.9% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The business enterprise tax will be imposed at the rate of 0.6% of the taxable enterprise value tax base for tax periods ending on or after December 31, 2019 and at the rate of 0.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 0.72%. The rate is scheduled to be reduced to 0.675% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The legislation also updates the state’s Internal Revenue Code (IRC) tie-in date for purposes of computing New Hampshire’s business profits tax liability to December 31, 2016 (currently, December 31, 2015). This change applies to tax periods beginning on or after January 1, 2018. It is effective June 28, 2017.

Further, IRC §179 (asset expense election) will be subject to a deduction limit of $500,000 for property placed in service on or after January 1, 2018. Currently, the limit is $100,000 for property placed in service on or after January 1, 2017. These changes are effective January 1, 2018.

The electricity consumption tax is repealed effective January 1, 2019.

Ch. 156 (H.B. 517), Laws 2017, effective July 1, 2017, except as noted above

NEW ARTICLE ON TAX CHOICE OF ENTITY

By , July 11, 2017 7:45 pm

Tax choice of entity is a critical task in any LLC formation.  Below is the cite to a new law journal article about LLCs and tax choice of entity:

9 Elon L. Rev. 311
Elon Law Review
2017
Article
Caolan J. Ronan
Copyright © 2017 by Elon University; Caolan J. Ronan
START-UPS: WHY INVESTORS PREFER THE CORPORATE FORM TO THE L.L.C. FOR TAX PURPOSES

SELLING LLCS

By , July 7, 2017 1:30 pm

LLC lawyers sometimes need expertise about the special issues involved in buying or selling family-owned businesses.  The post under the following link contains excellent advice about valuing these businesses:

http://www.taxlawforchb.com/2017/06/unreasonable-compensation-the-family-business/