Changing Entity Type

[Snaggletooth]

A client has approached me about changing her LLC from a partnership (1065) to a subchapter S (1120-S)

She believes this will reduce SE tax. I know this is not totally true.

Admitting to my ignorance, honestly I don't know how to do it, or if it can be done without shutting down the partnership and beginning another entity from scratch.
Can someone furnish a link to IRS code or reg if it is allowed. A link to a published commentary containing advice would also be helpful.

[TaxGuyBill]

It would eliminate SE tax. But the shareholder/employee would need to receive "Reasonable Compensation" and would pay FICA on the wages/salary.

Overall result, it WOULD save on Social Security and Medicare tax.

Whether or not that savings is worth it varies. Payroll costs, accountable plans, possible reduced QBI and reduced potential Social Security benefits need to be considered. Many people don't realize that paying less Social Security tax means reduced potential Social Security benefits.

The LLC can make the election to be taxed as an S-corporation (assuming they meed the requirements).

However, it seems like you are not fluent in these matters. In my opinion, you would be doing the client a disservice by advising them, so you may consider suggesting that client go elsewhere.

[terryats]

Here is a good place to start your research https://www.legalzoom.com/articles/c...-s-corporation. Over the years it seems (from a tax savings perspective) the partnership should have gross income around $100,000/ year. As Bill pointed out there may be other things to look at, so don't just look at the tax savings

[Snaggletooth]

One thing unique to Tennessee. An LLC is taxed at the Tennessee Corporate Tax Rate (although individuals and partnerships are not taxed unless they are an LLC).

Also the Tenn Corporate Tax rate is 6.5% on profits. However, amounts subject to SE tax are deductible!!