There was a previous discussion on this board about LLC members NOT having to pay SE tax because they were considered "limited" partners (only one poster from NC was of this opinion?). The MAY issuse of Lasser Tax Letter has an interesting article on this subject (sort of) - It seems the IRS was considering LLC members to be "limited" partners (SEC 469(h)(2) so that losses were passive and could only offset passive income! Since IRS has lost so many court cases (Newell, Garnett, Thompson) it is changing its position - Even though this is not exactly the discussion from the earlier post, the former IRS position of presuming LLC members to be limited partners WOULD INDEED SEEM to preclude them from SE tax?
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The IRS has never been consistent, why should they start now? OTOH, I have always treated LLC partnership losses (non-real estate flavor) as active and the IRS has never said a word. Neither have they complained about the SE tax on profits. -
Same here as snowshine.Comment
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I agree
Why WOULD the IRS complain about additional SE tax (I have ALWAYS treated members income as SE taxable also!)
I just found it interesting that IRS would "limit" losses by considering members to be "passive"!Comment
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The IRS does not balk
at receiving extra money for the SE tax. What they balk at is treating limited partner loss as active to offset other income. If there is an income it is not as looked at as thoroughly.
The issue is in the definition. By definition a LLC member is not liable for the debts of the partnership (at least in some states). By definition if a partner is not liable for the debts of the partnership then they are a limited partner. With the exemption of the managing member. Two partners can never both be the managing member.
Many tax planners have used this to their advantage by only taxing guaranteed payments for SE and the other profits as passive income for LLC member partners.
Does everyone agree on this? Obviously not! But the biggest problem lies in the fact that Congress has told the IRS to stay away from setting rules for LLCs because that is a state entity. So until there is a solid body of rules or court cases that agree then we are stuck with the grey area of LLC member partners.AJ, EAComment
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I'm that "crank" from NC
and no one has, to this point, been able to change my opinion on the SE taxability of LLC income (except GP's).Originally posted by luke View Post
The issue you are referencing is different in scope than the SE taxability issue. The issue you are addressing is that a member in an LLC who does not materially participate cannot use a resulting loss to offset ordinary income. It does not address the SE taxability of LLC profits.
My point is still that an LLC member who HAS NOT personally guaranteed LLC debt and DOES NOT take GP's is exempt from SE tax on his/her distributive share of profits because he is a limited partner, as defined in the Code.Comment
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Josh
Believe me I did NOT call you (nor did not mean to imply that you are) a "crank" - While I did not agree with you I found your position very interesting and I am always open to new ideas (especially ones that would save my clients $). I think where I have a problem is with the "definition" of "limited partner"? If the member is active in the LLC (performs duties in the LLC etc) then I dont agree that because he is a member of an LLC that he automatically becomes a "limited partner"? Now if member does nothing but receive distributions then I can see no SE tax (maybe?) (also is the limited partner definition in the Code for a "partner" or does it sepcifically include LLC members?Originally posted by JoshinNC View PostComment
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Same topic
This thread might be of interest:
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Thanks Gretel
I will now "officially" leave this topic alone and continue to prepare LLC returns as I always have....Comment
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