AccountingBLOCK - Tax and Accounting Forums

How does an LLC affect owners' personal taxes?

If a LLC has no gains/losses [activity] in a fiscal year, how does that affect owners' personal tax filings?

If a LLC is formed, say in August, what is the fiscal year term? In other words, would the owners have to report and file taxes in January of the following year or in August (12 months after forming the LLC)??

What are the tax advantages, for personal taxes, of forming an LLC?

I'm waiting for someone to respond.

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Income from an LLC is classified:

"How does an LLC affect owner's personal taxes"

1. Salary or wage (FICA)
2. Ordinary income from business (SET)
3. Distribution to Nonmanaging member
3. Return on capital investment (Return of investment from capital versus income from services)

An LLC returns a 1065 K-1 to partners allocating items of income and or losses, deductions, etc.
The "character" of the income or loss distinguishes LLC/LP planning. Capital gains are desired, Income
classified as ordinary income from business is shunned (application SET). If K-1 income characteristic
is limited partner, then FICA and SET are inapplicable (IRC : 1402(a)(13).

ref: http://www.accountingblock.com/video...-compared.html

Define the character of your distribution from LLC, home state and Municipal jurisdiction (Municipal Income Tax Application).

Judy Q from first-timer, appears the inquisitor's black robe?

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"If a[n] LLC has no gains/losses [activity] in a fiscal year, how does that affect owners' personal tax filings?"

I posit answer, return to ledger accounting, your LLC "has no gains or losses in a fiscal year"?
LLC Creation fees, LLC annual registration (state secretary of state fee*)?
PO Box, telephone, website, bank account, auto registration?
Business stationary, LLC Manager compensation?

Possible, yes. Likely, no.
A: K-1 distribution to partners reporting: "$0.00" income/loss, reported on LLC Members
Individual's 1040

*New Mexico lacks annual LLC fee.

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"What are the tax advantages, for personal taxes, of forming an LLC?"

Avoidance of FICA and SET. Allocating nonmanagerial uits, or LLC shares, to
owners offers the ability to eliminate Employment taxes.

Example:
2 LLC Members, FY 2009 DNI $100,000
Owner 1: 70% shares (69% nonmanager LLC units)
Owner 2: 30% shares (29% nonmanager LLC units)

SET applicable to 1% managerial units, remainder exempt.

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Just a couple observations:

(I don't research this stuff unless forced to so correct me if I put out any bad info)

1) Single member LLC P&L is shown on Schedule C Form 1040

2) Difficult to avoid SE taxes if involved in a trade or business.

3) An LLC set up to produce rental income would be non SE income.

4) Besides the rental income maybe someone could list other examples of non SE income commonly derived from LLC's.

Internal Revenue Code Subchapter K classifies partners as:
General Partners GP
Limited partners LP
LLCs consist of Managing Members (= GP) and NonManaging Members (= LP)

GP and LP structures commonly, though not typically, are constructed with multiple classes of GPs or LPs.




Yes, single member LLCs are "entities disregarded as separate from owner" The 1997 "check-the-box" regulations
clarified LLCs with single owners are disqualified from partnership treatment under Subchapter K. The inquiry
relates to LLC taxation without clarification regarding single or multiple owners. Single member LLC files Shedule C,
though I hesitate to denome the document a "P&L". P&L is a nontax term. Schedule C is a summary of earnings
determined according to tax law per Treas Reg., IRC, CFR.

Presume LLC is structured with majority owner (similar to S.P. management style) owning 97% of income interests,
3% owned by second nonparticipant LLC member. Majority owner bifurcates ownership into 1% Managing shares and 96%
nonmanaging LLC shares. Nonmanaging member owns 3% nonmanagerial LLC shares.

2. "Difficult to avoid SE Taxes if involved in trade or business". Bifurcation of LLC shares into managing and
nonmanaging units (LLC shares) effectuates the trigger of IRC sec. 1402(a)(13). Distributions of active business income
to LLC members for shares classified as nonmaging shares qualify, for purposes of Employment Taxes, as limited partner
shares exempt from FICA and SET. I know, as heretical as it sounds, we have been wondering why 95% of LLC operators
with less than $300,000 income missed the 1402a13 exemption.

3. Income from real property rental is NonWage Income similar to distributions of DNI to limited
partners from profits. Income from personal property requires a fact and circumstances annalysis
... delivery, duration of lease, maintenance, special services to operate, etc...

4. Guaranteed payments constituting compensation for contribution of capital to partnerships are exempt from
employment taxation. Example: Partner contributes specialized machine tool, agreed valuation $5,000. Partnership
distributes a preferred profits distribution of 4,250 to contributing partner. Guaranteed payment is exempt from 707(c)
application of SET to partners receiving distribution without respect to partnership business income. Special Posting per Pat's
to follow.

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IRC 1402(a)(13)
UCLA LR (2008)

Flat World Society (Academic Accounting Instructors) teach: Partners are subject to
the Self Employment Tax. FALSE.
General Partners are subject to SET on distributions in capacity of GP, GP may own LP units.
Limited Partners are exempt from FICA & SET. Exception: Guaranteed Payments.

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Helse,

Great info. It certainly demonstrates the value of a knowledgeable tax person.

2003

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