Partnership income K-1 question

[BHoffman]

Can partnership income from a K-1 be both non-passive AND exempt from self employment tax?

[Corduroy Frog]

Don't Know How

Beth, I don't really know how unless it is all rental/dividend/interest.

That's not to say hidden deep within the bowels of the code, there is another scenario which would allow this.

[BHoffman]

I think I found my answer, but I'm not sure.

The LLC is taxed as a partnership. It's business operations consist only of owning a 99% interest in another LLC. The members have spent a pretty good amount of time during 2014 developing another LLC, and they will hold a 90% interest in that business. The LLC doesn't produce anything. It just owns other LLCs.

The LLC has 3 members who are all limited liability members, so my understanding is that none of them are subject to SE tax on their distributive share of pass through income.

I know about the recent tax court case, but this doesn't have the same elements. All of the members have W-2 jobs that pay in excess of the SS limit.

1 member is the manager-member. She received a guaranteed payment that is, of course, subject to SE tax.

The manager-member and one other member have material participation that makes their distributive share of income non-passive in nature due to the time they spent on developing the new 90% LLC. They also can group their activity time with the 99% LLC. Their material participation does not require that their distribution share of income is subject to SE tax. It just means the income is not passive.

I was tangled up by thinking that if the income is non-passive, then it must be subject to SE tax.

If I'm all wrong (and I could be), I sure hope someone will correct me.

Thanks for the bump

[Gretel]

I have a vague memory when I was confused about the very same issue and posted on TTB. Bees Knees gave an excellent explanation. It's a number of years back but it still should be in the history. Sorry, I do not remember the details, only that these are separate issues.

[BHoffman]

Talked myself out of this one

Well, this morning the picture looks different. I don't see how income can be both non-passive and exempt from SE tax.

Bifurcation?

What do you think about making the $60k in guaranteed payment subject to SE tax (of course), and the remaining $300k passive?

[BHoffman]

Bless those extensions

I'm going to put this thing on extension and work on it later with a clearer head, sometime after my burned out brain cells come back to life.