Category: LLC Taxation

SELF-EMPLOYMENT TAX OF LLC MEMBERS

By , June 13, 2017 1:43 pm

Most multi-member LLCs are taxable as partnerships.  A key task of lawyers forming LLCs is often to minimize the Self-Employment Tax exposure of the members of these LLCs.  The post under the link below discusses a recent Tax Court case addressing the SET liability of the members of a multi-member LLC whose members were lawyers, and it finds that because all of these functioned like general partners of their multi-member LLC, all were liable for that tax.

However, the post does not discuss the usefulness of Prop. Reg. § 1.1402(a)-2 (the “Prop. Reg.”) in protecting from SET liability the members of multi-member LLCs taxable as partnerships.  The IRS has twice stated in public forums that the Prop. Reg. is its audit guideline for the SET liability of partners in entities taxable as partnerships.  Thus, the Prop. Reg. is a powerful tax-avoidance tool for LLC lawyers and their clients.

Here’s the link:  http://www.taxlawforchb.com/2017/06/self-employment-tax-llcs-the-limited-partner-exclusion/

S CORPORATION TAXATION

By , May 8, 2017 3:14 pm

Many LLCs are taxable as S corporations, and far more should be.  The attached post under the link below addresses a couple of fundamental and pervasive S corporation issues about basis and losses.  The post applies, of course, as much to LLCs that are S corporations as to state-law business corporations that are S corporations.

Here is the link:   http://www.taxlawforchb.com/2017/05/s-corps-basis-loss-limitations/

THE NEW FEDERAL PARTNERSHIP AUDIT RULES

By , April 20, 2017 4:34 pm

Under the link below is a brief but fairly good post summarizing the new and draconian federal statutory partnership audit rules that, for most multi-member LLCs taxable as partnerships, will become effective on 1-1-18.  A few comments about the post:

  1. Puzzlingly, the post doesn’t mention the key fact that under the above rules, the federal tax on any partnership audit deficiency will be a terrifying 39.6 percent.
  2. The post doesn’t mention that even if your LLC qualifies as a “small partnership” exempt from the rules, you need to elect out of coverage by the rules in your annual federal tax return.
  3. The post suggests that LLCs with members that are trusts and single-member LLCs may still qualify as “small partnerships” under the rules.  Based on certain recent Treasury statements, this suggestion is very probably incorrect.
  4. The post does not describe even briefly the types of audit provisions that the operating agreements of LLCs taxable as partnerships and other partnership entities ought to include.
  5. The post does not address the issue whether tax professionals whose clients are partnership entities should offer or agree to be available to serve as partnership audit “partnership representatives” for their clients.  I think they should, as long as the governing operating agreement  provides them with adequate contractual protection.

Chapter 50A in Drafting Limited Liability Company Operating Agreements, my Wolters Kluwer LLC formbook and practice manual, addresses all of the above issues.  If anyone would like a summary of the chapter by e-mail. I will be glad to provide you with one.

Here is the link to the above post:   http://www.lexology.com/library/detail.aspx?g=6fea3fe5-9c8a-4b37-a766-ab1666cefd36&l=7UML737

CONTRIBUTING PROPERTY TO A PARTNERSHIP

By , April 17, 2017 4:13 pm

LLC lawyers are sometimes asked by clients about the tax issues in contributing property to multi-member LLCs taxable as partnerships. The post under the link below provides brief but very helpful advice about deferring federal income tax in these situations.

Here’s the link: http://www.taxlawforchb.com/2017/03/protecting-tax-deferral-for-a-contribution-to-a-partnership/

GETTING STEPPED-UP BASIS IN ASSET PURCHASES

By , April 13, 2017 2:19 pm

The new post under the link below provides guidelines on how you can help your clients ensure that they get stepped-up basis in asset acquisitions.

Here’s the link:

http://www.taxlawforchb.com/2017/03/a-buyers-guide-to-acquiring-targets-assets-with-a-stepped-up-basis/

S CORP ISSUES ON WHICH THE IRS WILL NOT ISSUE PRIVATE LETTER RULINGS

By , March 23, 2017 2:42 pm

An ever-increasing number of LLCs are making S elections; so LLC lawyers who advise their clients about S corporation matters need to follow IRS Subchapter S developments.

Under the link below is a new post about a recent IRS announcement as to three S corporation issues on which the IRS will no longer issue private letter rulings to taxpayers including, of course, LLCs taxable as S corporations and their members.  These issues involve disproportionate distributions, certain types of agreements and other arrangements among shareholders raising single-class-of-stock issues, and certain types of defective S corporation filings.

Here is the link: http://www.lexology.com/library/detail.aspx?g=b82bfc37-1bf2-4217-b510-5afd783485ef&l=7U9VCHQ

LLCS AS S CORPS

By , March 17, 2017 2:32 pm

The post under the link below contains a brief but useful discussion concerning the basic pros and cons for LLCs in electing to be S corporations. The big pros of Subchapter S as compared with the default federal tax regimens of sole proprietorship and partnership tax are greater ease in reducing member Social Security Tax burdens and, in general, in achieving pass-through taxation.  However, the post fails to discuss or even to mention many of the unique sole proprietor and partnership tax benefits that LLC members will forgo if they make S elections.  The partnership tax benefits include, above all, those under Sections 701, 704, 721, 734,743, 754 and 752.

Here’s the link:  http://www.lexology.com/library/detail.aspx?g=0787f2eb-5fdd-479b-aacf-951af7768bae

LLCS AS S CORPS

By , March 17, 2017 2:27 pm

The post under the link below contains a brief but useful discussion concerning the basic pros and cons for LLCs in electing to be S corporations. The big pros of Subchapter S as compared with the default federal tax regimens of sole proprietorship and partnership tax are greater ease in reducing member Social Security Tax burdens and, in general, in achieving pass-through taxation.  However, the post fails to discuss or even to mention many of the unique sole proprietor and partnership tax benefits that LLC members will forgo if they make S elections.  The partnership tax benefits include, above all, those under under Sections 701, 704, 721, 734,743, 754 and 752.

Here’s the link:  http://www.lexology.com/library/detail.aspx?g=0787f2eb-5fdd-479b-aacf-951af7768bae

WHO IS THE TAXPAYER?

By , March 15, 2017 9:08 am

Under the link below is another excellent post by Lou Vlahos on a basic issue of federal income taxation.  Even lawyers who make no claim of tax expertise should be familiar with the tax doctrine stated so clearly in Lou’s post.

Here’s the link:   http://www.taxlawforchb.com/2017/01/who-is-the-taxpayer/

TOP 12 TAX SCAMS

By , March 10, 2017 9:49 pm

As you may know, the IRS has just released its list of what it views as the dirty dozen top federal tax scams. The link to the list is below. It’s possible that the list may be of interest to you or to some of your LLC clients.

Here’s the link: https://www.irs.gov/uac/newsroom/irs-summarizes-dirty-dozen-list-of-tax-scams-for-2017