Single member LLC holding company received a K-1 from another corp

[GTS1101]

I have a client who is an eye doctor. She created a holding company LLC and she is a single member owner. She received a K-1 from another corporation to her holding company LLC. I am assuming as a single member LLC in California that she will report the ordinary business income from the K-1 on Schedule C and then write off her expenses for the holding company LLC? I am assuming all the income received from the other corporation to her holding company is subject to SE tax as she materially participates in the income received from the corporation.

[TaxGuyBill]

If the Single Member LLC is a "disregarded entity", then do that - disregard it for income tax purposes. Treat it exactly as if the K-1 was issued directly to her individual name.

But back up - if the Single Member LLC is a Disregarded Entity, the K-1 SHOULD already be in her personal name and ID number. She needs to correct that with the other business.

[TaxGuyBill]

Oh, and if the K-1 is from a corporation and she is Materially Participating, the corporation needs to be issuing her a W-2 for her work performed.

[GTS1101]

Thank you Bill! Yes the company is issuing her a W2 each year.

It is a disregarded entity but why do you say the K-1 should be in her personal name? If that is the case then all her income will just be ordinary income not subject to SE tax and she won't be able to write off any of her expenses to setup the holding company LLC?

[TaxGuyBill]

why do you say the K-1 should be in her personal name?

If that is the case then all her income will just be ordinary income not subject to SE tax and she won't be able to write off any of her expenses to setup the holding company LLC?

The K-1 is from an S-corporation, right? See link to the 1120-S Instructions below (fourth paragraph under "Items E and F"):

https://www.irs.gov/instructions/i1120s#en_US_2021_publink11515kd0e4184

Yes, it is treated just like she owns it directly.

[GTS1101]

Thank you so much Bill! I greatly appreciate your help with all of this. I learned something new today that I was not aware of regarding the K-1.

What would your suggestions or recommendations be regarding how to report the income and if she can write off any of the expenses to set up the holding company LLC?

Could I report the income from the K-1 on a Schedule C as a disregarded LLC and then write off the expenses to set up the holding company LLC?

Or do you we report the K-1 income as ordinary income and then write off her holding company expenses as UPE expenses?

Or is she not allowed to write off the holding company LLC expenses since the income came through on a K-1?

[TaxGuyBill]

Offhand, I can't think of any way to deduct the setup costs of the LLC. It is not a Schedule C business and it is not a Partnership expense, so UPE wouldn't seem to apply.