LLC! No, No scorp!. No, No LLC!

[OldJack]

The proposed regs say that they are not effective until published in the Federal Register as final regulations. There was no need to withdraw them because they have yet to become effective.

True but it is a clear indication of the IRS position until there is a law one way or the other. Do you want your client to be the test case if the IRS decides to take it to court?

[Matt Sova]

Still incorrect

I clearly identified in my original post that this was "Proposed Regs" for a LLC-1065. That as far as I know is the only thing we have today to hang our hat on. You have nothing for your position other than partnership regs that clearly say SE tax.

I know I responded to this, but I do not know where it went. How do you "hang your hat on" Proposed Regs? They mean nothing as far as tax law goes. There is nothing within the tax law that stipulates LLC members are subject to SE tax. LLC members have limited liability, just like limited partners in a limited partnership. That is where the entire argument is stemming from. Personally I think it will be a matter that will be settled in the courts, but until that day comes I will continue to treat the profits of an LLC as non SE taxable and saving my clients money.

[TAX]

Confirming....

I know I responded to this, but I do not know where it went. How do you "hang your hat on" Proposed Regs? They mean nothing as far as tax law goes. There is nothing within the tax law that stipulates LLC members are subject to SE tax. LLC members have limited liability, just like limited partners in a limited partnership. That is where the entire argument is stemming from. Personally I think it will be a matter that will be settled in the courts, but until that day comes I will continue to treat the profits of an LLC as non SE taxable and saving my clients money.

I am concluding from your coments that you are refering to multimemebr LLC. If it is a single member LLC then it is disregarded entity and hence sole propriter. As a result SE tax would be there.

Please confirm.

[OldJack]

Matt, It is a fact that a LLC-1065 defaults as a federal partnership with partnership law and rules. Therefore, the members are not automatically limited partners just because they were members of a LLC that gives them state protection from liability or just because you say they are. For federal tax purposes the LLC does not exist. If the LLC members are to be limited partners for federal tax purposes they have to meet the same requirements as would any other limited partner in a partnership.

[Unregistered]

I think he would be better of as scorp rather than LLC as he has to pay SE tax on LLC income

the tax implications have been discussed so i will skip that.

however, since he is a medical lab I am suprised he is not a corp. Strictly speaking from a liablity point of view. I hope he talked to an attorney, first .

[Bees Knees]

Matt, It is a fact that a LLC-1065 defaults as a federal partnership with partnership law and rules. Therefore, the members are not automatically limited partners just because they were members of a LLC that gives them state protection from liability or just because you say they are. For federal tax purposes the LLC does not exist. If the LLC members are to be limited partners for federal tax purposes they have to meet the same requirements as would any other limited partner in a partnership.

What is your definition of a limited partner? Section 1402(a)(13) says a limited partner is not subject to SE tax, except for guaranteed payments. The code does not define what is meant by a limited partner. T.C. Memo. 1994-215 says "State law requires that certain formalities be observed to create a limited partnership."

Doesn't an LLC have to observe "certain formalities" and isn't the very definition of an LLC a partnership whose members enjoy "limited liability?"

[Matt Sova]

Mmllc

Tax, as stated about a billion posts ago in this thread, yes it is MMLLC not a SMLLC. Jack, one thing you really need to understand is I am always, always right. Therefore my treatment of the MMLLC is correct. Hopefully everyone is laughing.

Seriously though, if you prefer the conservative, give the IRS more than their share, approach that is fine. But, until there is some sort of ruling somewhere that gives us guidance on the issue I will continue to be aggressive and tread into the grey.

Matt

[OldJack]

Bees Knees

What is your definition of a limited partner? Section 1402(a)(13) says a limited partner is not subject to SE tax, except for guaranteed payments. The code does not define what is meant by a limited partner. T.C. Memo. 1994-215 says "State law requires that certain formalities be observed to create a limited partnership."

Doesn't an LLC have to observe "certain formalities" and isn't the very definition of an LLC a partnership whose members enjoy "limited liability?"

It is clear that the IRS does not consider your "formalities" of the LLC as they have clearly determined that the LLC is disregarded and taxed as a "partnership" (not a limited partnership) with partnership rules. Also, the sentence you quote with formalities appears to be talking about requirements of the state to create a "limited partnership" by statute, that is not the case here. I do not have a definition of a limited partner as that is what appears to be undefined, however, as I stated before the IRS position has been stated and appears to be logical to me so that is my position with my clients:

My previous post:

<< Profits of a LLC-1065 is subject to SE tax by the individual member/partner unless the member/partner meets the limited partner rules, (1) has no personal liability for the debts of or claims against the partnership solely by reason of being a partner; (2) has no authority to contract on behalf of the partnership under the law of the jurisdiction in which the entity is organized; or, (3) participates in the entity's trade or business for no more than 500 hours during the taxable year. Guaranteed payments, of course, are always subject to SE tax.>>

[OldJack]

Seriously though, if you prefer the conservative, give the IRS more than their share, approach that is fine. But, until there is some sort of ruling somewhere that gives us guidance on the issue I will continue to be aggressive and tread into the grey.

Matt

Matt I was wrong once just like you. It is not that I am conservative or want to give the IRS more than their share, it is about filing the tax returns where I sign to the best of my knowledge it is correct. It is my opinion that the LLC taxed as a partnership should not try to claim it is still a LLC with that alone making it a limited partner. There is "guidance" as the IRS has not withdrawn the proposed reg. Granted a proposed reg has no enforcement. If the LLC wants to avoid the SE tax issue, why be lazy, go ahead and simply file the election to be a S-corp and then you don't have to be grey.

[Matt Sova]

Lazy

Matt I was wrong once just like you. It is not that I am conservative or want to give the IRS more than their share, it is about filing the tax returns where I sign to the best of my knowledge it is correct. It is my opinion that the LLC taxed as a partnership should not try to claim it is still a LLC with that alone making it a limited partner. There is "guidance" as the IRS has not withdrawn the proposed reg. Granted a proposed reg has no enforcement. If the LLC wants to avoid the SE tax issue, why be lazy, go ahead and simply file the election to be a S-corp and then you don't have to be grey.

Lazy has nothing to do with it. S-Corps have to have payroll so if the company has employees besides the owners than yes we will go that route. If not, we go with the LLC and GP's subject to SE. Also, sometimes the owners want 50/50 ownership, but Profit and Loss sharing at some other calculated percentage. As you know, you cannot do that with an S Corp.

[Bees Knees]

Profits of a LLC-1065 is subject to SE tax by the individual member/partner unless the member/partner meets the limited partner rules, (1) has no personal liability for the debts of or claims against the partnership solely by reason of being a partner; (2) has no authority to contract on behalf of the partnership under the law of the jurisdiction in which the entity is organized; or, (3) participates in the entity's trade or business for no more than 500 hours during the taxable year. Guaranteed payments, of course, are always subject to SE tax.

And your above IRS definition of a member in an LLC had this reaction from Congress under Section 935 of the Taxpayer Relief Act of 1997:

"No temporary or final regulation with respect to the definition of a limited partner under Section 1402(a)(13) of the Internal Revenue Code of 1986 may be issued or made effective before July 1, 1998."

Congress reacted specifically to the rules you stated above. I believe Congress does have the authority to tell IRS to back off.

THAT is the reason IRS has yet to issue ANY rule on the subject since January of 1997.

[OldJack]

Congress reacted specifically to the rules you stated above. I believe Congress does have the authority to tell IRS to back off.

THAT is the reason IRS has yet to issue ANY rule on the subject since January of 1997.

Congress simply said no final reg "before 1998", so congress' position is no longer an issue or valid and the IRS can do as it pleases. I believe that we have voted and congress has changed since 1998.

Therefore, the only guidance we have is the proposed reg that has not been withdrawn and could be issued as a final reg any day the IRS wants to do so.

[Armando Beaujolais]

And your above IRS definition of a member in an LLC had this reaction from Congress under Section 935 of the Taxpayer Relief Act of 1997:

"No temporary or final regulation with respect to the definition of a limited partner under Section 1402(a)(13) of the Internal Revenue Code of 1986 may be issued or made effective before July 1, 1998."

Congress reacted specifically to the rules you stated above. I believe Congress does have the authority to tell IRS to back off.

THAT is the reason IRS has yet to issue ANY rule on the subject since January of 1997.

The "no regulation may be issued" statement doesn't say one way or another. It just says no regulation may be issued. It didn't withdraw any previous, or set forth any new treatment. I think people read way too much into the statement from a standpoint of looking to it as guidance for treatment of LLC income.

The crux of the problem is that the Internal Revenue Code defines "general" and "limited" partners on one criteria: Liability. If you're liable, you're a general partner. If your liability is limited, you're a limited partner.

By definition there is no equivalent to a general partner in an LLC because everyone's liability is limited. It's an irreconcilable conflict within the code. Under the code there has to be at least one general partner in a limited partnership. But there can't be a general partner in an LLC because general partners are defined by liability exposure.

The IRS tried to fix the problem by applying some rules. Congress recognized that it will take legislative action to solve the problem, that's why they issued the "no regs" law. Then, as usual, Congress wimped out and didn't address the solution in any subsequent legislation.

The real issue here, in my opinion, is all about reasonable wages, not about whether LLC income is subject to SE. No different than an S corp. If the income is from services, it's subject to SE. But, just like with so many S corps, it gives the opportunity for people to pretend that the income isn't from services. I don't mind being aggressive on behalf of my client, but I won't pretend.

I lost a client last week who went from sole prop real estate agent to 100% S corp owner. A colleague told her to form an S corp to avoid SE tax. I explained that the type of business entity listed on the paper in her filing cabinet had nothing to do with the reality of how the income was earned - 100% from personal services. She earned $50,000 in commissions. To make the point, I asked her to put herself in the position of her company. Under identical circumstances, how much would she pay someone who had the exact same production as she did. She said "Oh, I'd pay them about $15,000."

Uh huh.

[Bees Knees]

Try again....

Therefore, the only guidance we have is the proposed reg that has not been withdrawn and could be issued as a final reg any day the IRS wants to do so.

Congress said "No temporary or final regulation with respect to the definition of a limited partner under Section 1402(a)(13) of the Internal Revenue Code of 1986 may be issued or made effective before July 1, 1998."

When was the proposed Reg you quoted from issued????

It was issued in January of 1997. Since it was issued before July 1, 1998, it was made irrelevant.

Therefore, the only guidance we have on the subject is the code section itself, which says a limited partner is not subject to SE tax, except on his guaranteed payments.

So what is your definition of a limited partner????

Since no proposed, temporary, or final regs have been issued since July 1, 1998, you can’t use anything but code section 1402(a)(13) to define a limited partner.

Is an LLC member, taxed as a partnership a limited partner???

Yes or no?

[JON]

This subject has been discussed

A RE agent who had $50,000 1099 for commisions would end up with a fraction of that after expenses. The White paper a year ago question why should an S Corp have anything different in SE than 1040 Sch C, and were astonished by the number of S Corps formed since 1997. The anwser to the first part of the question was S Corps were allowed not to pay as much SE. Budgetary allowed more budget money to audit more S Corps-what to look for was still a good question. Reasonable compensation was the issue and then comes the confusion. S Corp has every right not to call all income salary, the government created this not the taxpayer. IRS has already responded to the GAO saying payroll taxes were probably a huge issue and the fact of being taxed once was the other for the growth in S Corps. RE agent's who were 1099 d for there activities were seldom allowed to form S Corps until recently when agents became so big and strong they changed rather than lose them. There is a downside to not paying in-you potenially could qualify for less.. Reasonable compensation defined at a meeting with IRS they referred to posted surveys, and in 10,000 lakes they referred to the Department of Economic Opportunity surveys-we smiled as I would personally love to use those. I have more S Corps than Cs all owners draw salaries, all get plenty of UTI and they like that, but audit has never had compensation become an issue. The only S Corp locally I have heard of a change were insurance agents in the early 1990s each having a salary of $12,000 annually and their UTI was $80,000 a piece. They deserved the change... Radical change to the current tax law is going to have to happen for me to worry about my S Corp clients or my S Corp. RE agents, Doctors, Tax accountants will always pay less in FICA as an entire group than if they were a Schedule C. I acknowledge they may pay the same FICA, but never the same MEDI. They would never be expected to know there income and have it paid out at the year end. Reasonable compensation-you can make it as hard as you want, I think it is easy in todays market. THE END