LLC started a new business in 2006. had net profits of approximately $80,000. neither partner received a guarenteed payment. how much of the net profit is subject to SE tax and what amount is considered a distributive share of profits.
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Zero, maybe.
If no health insurance was paid for the partners by the LLC and there is no mention in the Operating Agreement of payments to the partners for services rendered irregardless of profit than they have no SE income.
The distributable net income is the net income multiplied by the distribution percentage in the Operating Agreement for each partner. If no such language is in the agreement than it is split 50/50 or based upon percentage of total capital contributed.
You will get other opinions on this, though. -
Depends. What type of business is it?. Did the members provide services? Did they elect to be taxed as a partnership? How many members? If they provided services for the LLC you should set up guaranteed payments based on what they would pay for the same services. Some on this board will tell you all should be SE. I personally advise my clients to show as guaranteed payments at least what it would cost to hire someone to perform the services they provide to the LLC.Comment
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I advise my clients to pay themselves nothing!
There is NO provision in the law that says that a multi-member LLC must pay it's members who provide services GP. It does, however, say that if they are paid GP, it's subject to SE tax. Therefore, by paying no GP, and taking all distributions, there is no SE tax.Comment
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I think advising clients to pay no SE is borderline malpractice despite how you read the law. If this is the only income for the family what happens if taxpayer dies or becomes disabled. No SS paid. No benefits. This withstanding, I still have to respectfully disagree with your position.Comment
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If they provided services how can you not say some amount of the distributions are not payment for their services which would be subject to SE?Comment
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They are getting paid for their services, the net income.
For example, if I operate my tax business with a partner, and we are the only one's who work there than the net profits are our compensation. If we don't come to come to work we don't make any money, and there are therefore no profits to distribute. If the Operating Agreement doesn't say we have to take a certain amount of money than we don't have any GP.
Malpractice my butt! Making your client think that SS is going to pay the bills if they die is more malpractice than advising them on a lawful way to avoid unneccesary taxation. The client could take the amount that would go towards SS and put it in a tax deferred account earning significantly more, producing much better results.Comment
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Sure, if they don't die or become disabled for 20 years!Comment
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I think that is being very aggressive and I would at least let your clients know that this has yet to be challenged in court, as far as I know. There are several discussions on this topic and proposed regs but nothing concrete. Try this link for some discussion.
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That's what life insurance is for.
A $50 a month premium to fund a $500,000 20 year term policy sure beats the pants off $946 per month in SE tax on $80,000 GP for a benefit of about $1200 per month.
You're an accountant, do the math.Comment
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I always determine the agressiveness of my clients prior
to making these types of decisions. If my client is inherently very conservative I won't even bring it up. But, if they want to take all legal (as you say, no court cases to prove otherwise) steps to avoid SE, we jump on it.Comment
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Originally posted by JoshinNC View Post
Then be prepared to take it to court.
Until there is a court precedent, there is no right or wrong answer.
Having said that, tax seminars that I have attended indicate IRS audits on the LLC SE tax issue are currently operating similar to the S corp wage issue. Rather than go to court, IRS and taxpayer reps are compromising on the reasonable comp issue. I would definitely not advise trying to get away with zero guaranteed payments. Auditors are currently taking an aggressive approach, and the compromises are learning more towards the Social Security maximum wage base, rather than next to zero.
If you want to be the first test subject in tax court, go ahead. But no IRS auditor is going to back down from the stand that at least something needs to be subject to SE tax.Comment
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It's ALL subject to tax
Just not SE tax. There is NOWHERE in the code that requires that a taxpayer who is a limited partner take GP. If the taxpayer is smart enough to not write wording into the operating agreement that specifies these types of payments I don't see a leg for the IRS to stand on.Comment
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There is also nowhere in the code that says an LLC member is a limited partner. I guess that means the IRS and the courts could interpret that to mean all LLC member income is subject to SE tax under general partnership rules.Originally posted by JoshinNC View Post
Under what grounds do you say the LLC member is a limited partner? If the LLC member is a limited partner, as limited partners are currently defined in the code and regs, then under Reg. Section 1.448-1T(b), no LLC can use the cash accounting method, as any partnership allocating at least 35% of losses to limited partners is defined as a tax shelter.
Tax shelters are not allowed to use the cash method.
Now is it your opinion that LLC members are limited partners?Comment
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Thinking out loud.........
I struggle with the LLC's and SE issue so I'm just thinking out loud:Originally posted by JoshinNC View Post
But isn't a limited partner presumed not to have matrially particated in the activity?
In the LLC that you and your partner are operating you are materially participating so even if specified in the operating agreement that you are a limited partner doesn't make it legite, or does it?
If a reasonable amount is not taken for your work in the LLC I would think the IRS does have a leg to stand on.Comment
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