LLC / at risk / SE tax

[natiro]

LLC member (A) receives K-1 with (60,000) loss on line 1 and 45,000 guaranteed payment on line 4. The member is member-manager and if there had been income on line 1, would be subject to SE tax (ignoring the arguement that some preparers have about LLC members not being subject to SE tax. . .I'm assuming at the moment that this member would be subject - in other words, this is not my question so please don't argue your case about this!!!)

A different LLC member (B)has loaned the LLC 500,000 over the years. It is my understanding that because the LLC member (B) loaned the $, this would be considered recourse debt and my client (A) gets a portion of the recourse allocated to him (50%). As a result, he would have enough basis to take the 60,000 loss and would offset the 45,000 accordingly. However, since my client (A) did not loan the funds to the LLC himself, he is not considered at-risk. Therefore, he is unable to take the ordinary loss due to the at-risk limitations.

So here's the question: Lacerte offsets the guaranteed payment by the ordinary loss for SE purposes, even thought the loss is not allowed. As a result, he is reporting 45,000 of guaranteed payment on Sch E page 2, but it is not subject to SE tax even though the loss on line 1 is not allowed this year. This makes a certain amount of sense to me and hopefully is correct. I'm wondering if anyone can confirm that this is how it's handled.

It's summer. . .I'm not posting often, although I do check in regularly. I guess I'll just enjoy junior membership for a while!!!!

Thanks!

[BOB W]

Llc/se

Natiro> It has always been my understanding that garanteed payments were the same as a W2 for a Corp, neither being effected by any profit or loss incurred by the entity. It is strange that Lacert would apply the loss against his SE taxes.

[Bees Knees]

LLC SE tax issue

I disagree that you can’t consider the SE tax issue on LLCs, when your question is based on the correct calculation of SE tax.

If this were just a plain old general partnership without the LLC status, your assumption would be correct. The SE tax on the guaranteed payments would be offset by the line 1 distributive share of loss. But that is because without the LLC status, the partner would be at risk for the line 1 loss as a partner. Even though it was directly loaned to the partnership by another partner, all partners in a general partnership are liable for all debt, including debt from another partner. Therefore, the loss would be allowed for both income tax and SE tax purposes.

When you throw in the LLC issue, now you have to deal with at-risk rules because LLC members are not personally liable for the LLC debts. The loss is suspended under the at-risk rules for income tax purposes. Is the loss also disregarded for SE tax purposes?

I believe so. When you say you are not liable for LLC debt due to your limited liability status, that means you are a limited partner for purposes of that specific income or loss. Section 1402(a)(13) makes it clear that SE tax does not apply to the distributive share of income or loss as a limited partner. How can you separate at-risk rules from limited liability rules if the sole reason why you are not at-risk is because of your limited partner status in the LLC?

[JON]

Agree maybe with Bees

Until this year I did an LLC member's tax return. Another firm did the parntership and other partner's return. When I got his K-1 it had $75,000 as an ordinary loss and $60,000 as guaranteed payments. I gave it back to him and said let them do his return. He had no basis.

Difference to Bees point is one of the advantages of LLC single member to S Corp has always been "at risk" was not an issue for LLC at seminars. My cases except for above at risk has not been an issue, but questions have never been answered.

Self employment issue was discussed extensively on another board with the majority view point for LLCs filing 1065 if it was not on the guaranteed payment line it was not subject to SE tax. If you do not combine them then you sure do not now.

The above other CPA firm told me they had no problem netting for SE and giving him the net loss-not worried by at risk or limited arguements.

As soon as Bees gets audited he well give us the correct information. Maybe tax book editors will answer us..

[Bees Knees]

SE tax for LLC members

As soon as Bees gets audited he well give us the correct information. Maybe tax book editors will answer us..

Natiro didn't want to talk about it, but I do. My position is you put the payment for services under guaranteed payments and you put the payment for the investment in the business as line 1, K-1, distributive share of profits and losses. This would be similar to the S corp issue over paying reasonable wages to the shareholder on the W-2 and the rest goes on line 1 of the K-1.

Same principle. Pay social security taxes on payments for your services, and no social security tax on your investment. My prediction is Congress or IRS will eventually settle the issue in this manner.

[JON]

Actions are needed!!!!

Actions Are Needed to Eliminate Inequities in the Employment Tax Liabilites of Sole Proprietorships and Single-Shareholder S Corporations-issued May 2005 Reference Number : 2005-30-080... This is the Final Audit report issued by Pamela J. Gardiner, Deputy Inspector General for Audit. Memorandum for Deputy Commissioner for Services and Enforcement.

The scope is limited to just the topic-but numbers they say they are missing out on are huge. I got it at forum, but it says the change is due now. A more interesting topic is look at the responses from the IRS and use them in your next audit. The whole thing is 34 pages. Inspector General for Tax Administration has their seal on it. This is what they present to Congress to try and get action. Congress can they act????

I have no idea why they limited the topic, but when they change laws I am sure they will encompass more than that.