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

[rosieea]

There is one other way you can "legally" avoid SE tx.

LLC can have more than one class of stocks Vs. Scorp.

LLC has two classes of members: Regular vs. Limited. In my research, only member with Regular "class" pays SE. This does requires special LLC setup. but it works and as a result you can reduce SE tax "significantly". Obviously, you will issue small amount on K-1 to regular member and large amount to Limited member.

Has anyone done this before? Is this legal? I just need some input. I have not done it yet.Is it too good to be true?!

Thanks.

I've seen partnerships set up such that a partner can have both general and limited shares, with general share being a very small percentage. Set up by a savvy tax attorney & never a peep from the IRS. I don't see why it wouldn't work in an LLC: small percentage to Managing Member status, and large percentage for Member (limited) status.

[BOB W]

Dear TAX

Yes, LLC can have different classes of members. And yes, various allocations can be accomplished. But I believe you are starting your posistion based on "all profits are subject to SE. As this thread indicates, LLC's are not subject SE on its NP.

So the minipulation that you are going through may be accomplished in simpler ways.

I've seen, but I have not approved, having employees as miniority members with no contribution to capital and all payments to them listed as GP. ???????? How's that for minipliation??

[BOB W]

Flp

This happens alot with FLPs> same partner is listed as General and Limited partner. Two separate K-1s.

[OldJack]

As this thread indicates, LLC's are not subject SE on its NP.

I don't understand how you can make a blanket statement that an LLC-1065 is not subject to SE tax when the LLC is a disregarded entity treated as a partnership subject to partnership laws that say only limited partners may not be subject to SE tax.

[BOB W]

Thread....

is about LLC partnership not Disregarded LLC ( single member LLC). An LLC partnership does not follow partnership rules, otherwise they would be a general partnership. LLC are formed by the a State. The state where it is formed controls what is allowed or not allowed. IRS recognizes that they are different from a general partnership and tried to get LLC to fall under General Partnership rules but was stopped by congress. So LLC's net profits are not subject to SE.

[OldJack]

is about LLC partnership not Disregarded LLC ( single member LLC). An LLC partnership does not follow partnership rules, otherwise they would be a general partnership. LLC are formed by the a State.

All LLC's are disregarded entities with regards to how they file their federal tax return. The LLC is subject to the same laws as all other entities filing the same type tax return.

Self-Employment Taxes:

1. LLCs filing Schedule C or E-
Members are subject to
self-employment taxes on earnings.

2. LLCs filing Partnership Returns-
Generally, members pay
self-employment tax on their share
of partnership earnings.
There is a special rule for members
who are the equivalent of limited
partners. They pay self-employment
tax only if the LLC pays them for
services.

http://www.irs.gov/pub/irs-pdf/p3402.pdf

[BOB W]

Llc/se

I believe that is what the IRS wants but congress has a different posistion. But maybe Brad is more familar with the info you are providing. ??????

[OldJack]

I believe that is what the IRS wants but congress has a different position.

Congressmen may have a different position but unless they enact a law we have to respect the position of the IRS.

Who is Brad?

[Bees Knees]

TTB, page 5-25 "Controversy still exists whether an LLC member's distributive share is subject to SE tax as a general partner, or not subject to SE tax as a limited partner. The IRS wants SE tax under most conditions if the LLC member works for the LLC [Proposed Reg. Section 1.1402(a)-2(h)]. Congress repealed all regulations dealing with the topic prior to July 1, 1998, including the above proposed regulation [Section 935 of Taxpayer Relief Act of 1997]. Congress and IRS has yet to release any further guidance dealing with the issue."

Bottom line, everything IRS has in writing was repealed by Congress in 1997. IRS has refused to issue anything new since.

We are still on our own on this one.

[Bees Knees]

It should also be noted that the proposed regulations issued on the subject had this little tid bit at the very end:

"(j) EFFECTIVE DATE. Paragraphs (d), (e), (f), (g), (h), and (i) are
applicable beginning with the individual's first taxable year
beginning on or after the date this section is published as a final
regulation in the Federal Register.

[62 FR 1702, January 13, 1997]"

In other words, even without the repeal of the proposed regs by Congress in 1997, the proposed regs were not to apply until after they were finalized. IRS never finalized them, because Congress repealed them six months after they were issued.

[OldJack]

But we still know the IRS's position as they have stated in their 2005 Pub 3402. I regard that as a position I will take with my clients.

[Matt Sova]

Still Wrong

Jack

You have nothing to hang your hat on either. Proposed Regs do not mean diddly squat. I, on the other hand, do have something to hang my hat on. LLC members are treated for SE tax purposes just like Limited Partners in a partnership. This is where the entire problem is rooted. You cannot show me anywhere in the tax code, regs, etc that is an authoritative document that says LLC members, taxed as a ptnrship, have to pay SE tax on the earnings.

The approach you take is the conservative approach. I love meeting with prospective clients that use someone like you. When I explain the whole picture, including the pitfall that there is nothing out there telling us what is correct, they almost always switch to using me.

Matt

[Bees Knees]

But we still know the IRS's position as they have stated in their 2005 Pub 3402. I regard that as a position I will take with my clients.

I have been to many seminars where this issue has been discussed. Each time the speakers ask the audience their experience with IRS on the subject. To date, nobody has been challenged. Each time an auditor has raised the issue, they drop it when the tax preparers state the facts. There were also numerous cases where tax preparers filed amended returns to claim a refund for SE taxes paid on K-1, line 1 profits that had been reported as subject to SE tax on the original return. The IRS processed the amended returns and refunded the money, no questions asked.

It appears IRS may now be making some noise in their Pubs. But so far they have been a lame duck on the issue. Anytime anyone objects, they back off. IRS is clearly just as frustrated with Congress on this issue as everyone else is.

[OldJack]

Matt I don't take new clients and I haven't lost a client in about 15 years ( other than dead ). I do occasionally get requests to take clients when they have had problems with the IRS because of errors created by their tax preparers. The approach I am taking is from the fact that there is an IRS position published and you have nothing stating your position other than all members are limited partners. The actual dispute is regarding the definition of who qualifies as a limited partner? Maybe you should review page F3 in the small business Quickfinder handbook where it states that the IRS has never withdrawn the purposed reg (the 3 points that defining a limited partner) even though congress said no final reg shall be issued.

[Bees Knees]

Maybe you should review page F3 in the small business Quickfinder handbook where it states that the IRS has never withdrawn the purposed reg (the 3 points that defining a limited partner) even though congress said no final reg shall be issued.

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.