LLC Tax

IRS Re-Issues Proposed Regulations on Centralized Partnership Audit Rules

Winston & Strawn LLP:  “On June 13, 2017, the U.S. Treasury Department and Internal Revenue Service (“IRS”) re-released proposed regulations (the “Proposed Regulations”) governing the new centralized partnership audit regime that is scheduled to become effective for partnership taxable years beginning on or after January 1, 2018. . . . The Proposed Regulations provide, among other things, rules and procedures for (i) electing out of the centralized partnership audit regime, (ii) designating and replacing the partnership representative, (iii) determining amounts owed by the partnership or partners attributable to adjustments that arise out of a partnership audit, and (iv) “pushing out” partnership adjustments to the persons that were partners in the partnership in the taxable year under audit (the “review year”). . . . Partnerships . . . should be considering appropriate amendments to their partnership agreements to address a number of the issues discussed above, including

(i) the designation and removal of the partnership representative,
(ii) partners’ notice and participation rights in connection with audits,
(iii) appropriate indemnification protection for the partnership representative, and
(iv) how to ensure that imputed underpayments are economically borne by the appropriate partners (or former partners).

By |2017-06-24T14:20:39+00:00June 22nd, 2017|LLC Tax, New Tax Audit Rules|

Is Your LLC Taxed as a Partnership Ready For IRS Audit Changes?

JD Supra:  “many partnerships and limited liability companies (LLCs) have not yet delved into significant IRS audit rule changes that are certain to go into effect next year [January 1, 2018]. The changes, which will impact the 2018 tax year for partnerships and LLCs, will present owners with new decisions about how to handle IRS audits and any adjustments that may be required. . . . What Partnerships and LLCs need to do: Every partnership and LLC [taxed as a partnership] should consider revising their agreements to adapt to these new rules. For example, they must determine who will have decision-making authority over the elections that can be made, such as opting out of the new audit regime, or electing to push out adjustments to the partners. In addition, current partnership agreements do not provide for reserves for taxes, indemnifications, or holdbacks or clawbacks if there are any assessments. Failure to address these important issues may lead to disputes among partners, and could also impact buyers and sellers of partnership interests.”

By |2017-06-21T07:44:55+00:00June 21st, 2017|LLC Tax, New Tax Audit Rules|

Is Your LLC Taxed as a Partnership Ready for IRS Audit Changes?

JD Supra:  “The updated IRS audit rules include new terminology, and will require such steps as new elections and changes to partnership agreements to account for a new audit landscape. The legislation driving the rule changes was passed two years ago. The new rules, embodied in proposed regulations re-issued last week, require changes in partnership agreements and LLC operating agreements. Starting with partnership returns for the 2018 tax year, partnerships will experience changes in how IRS audit adjustments are made to its partners’ returns.”

By |2017-06-24T14:44:42+00:00June 20th, 2017|LLC Tax, New Tax Audit Rules|

Re-Proposed Partnership Audit Regulations are Here

Bloomberg BNA:  “There is good news for partnerships and their counsel who spent the last five months studying proposed centralized partnership audit regulations that the IRS issued on January 18 and withdrew on January 20: the proposed regulations reissued on June 14 (REG-136118-15) are essentially the same as those published in January.  The proposed regulations implement the new centralized partnership audit regime enacted as part of the Bipartisan Budget Act of 2015 (BBA). The new regime and the proposed regulations generally apply to returns filed for partnership tax years beginning after December 31, 2017 . . . .

Preparing for the New Regime

Many partnerships (and limited liability companies taxed as partnerships) will find it necessary or desirable to amend the partnership (or operating) agreement in response to the new audit rules. For example, partnerships should carefully choose their representative and evaluate how the partnership agreement might be amended to provide guidance for the exercise of the representative’s broad statutory authority. Partnerships also should consider the ramifications of various partnership actions and elections, including the push out election, that affect both the partnership’s own financial condition and the tax attributes passed through to the partners. As well, the new rules provide that partners generally may not participate in or contest the results of an examination or other partnership proceeding without permission of the IRS. Therefore, the partnership should consider what safeguards might be appropriate to protect its own and its partners’ interests in the event of an audit.”

By |2017-06-21T07:51:46+00:00June 16th, 2017|LLC Tax, New Tax Audit Rules|

IRS Issues Proposed Regulations for New Partnership Tax Audit Rules

The IRS recently issued proposed regulations (REG-136118-15) that will, if implemented, govern the new partnership audit rules created by Section 1101 of the Bipartisan Budget Act of 2015, P.L. 114-74, and amended by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113. These new rules apply to partnerships and limited liability companies that are taxed as a partnership for federal income tax purposes beginning January 1, 2018.

The new partnership audit rules allow the IRS to assess and collect income tax at the partnership level rather than from individual partners. The new audit rules replace the partnership audit procedures created under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The new audit rules apply to tax years beginning January 1, 2018.

The Bipartisan Budget Act of 2015 replaced the TEFRA tax matters partner with a partnership representative that must be a person or entity that has a “substantial presence” in the United States. If the partnership or LLC taxed as a partnership fails to designate a partnership representative the IRS may name the partnership representative. This is one of the reasons LLCs taxed as partnerships must amend their Operating Agreement or adopt an Operating Agreement, i.e., to name a partnership representative in the Operating Agreement to prevent the IRS from doing so. The LLC taxed as a partnership cannot change its designated partnership representative without the IRS’s consent.

The partnership representative can be an entity or a person. The partnership representative does not have to be a member of the LLC. After being appointed by the partnership or LLC, the partnership representative must then be designated on the partnership’s or LLC’s tax return.

Take care when appointing a partnership representative because the partnership representative has the sole authority to deal with the IRS on behalf of the partnership or LLC and all of its partners or members with respect to the following matters: (i) settling a tax audit, (ii) agreeing to a final partnership tax adjustment, (iii) making an Internal Revenue Code Section 6226 election to pay a partnership liability at the partner level, and (iv) agreeing to a Section 6235 extension of the period for making partnership adjustments.

The new audit rules take effect January 1, 2018. There are three important take a-ways to be learned from the new partnership audit rules:

  • All existing partnerships and limited liability companies taxed as partnerships that have an Operating Agreement need to amend their Operating Agreements to add provisions dealing with the new partnership audit rules and to designate a partnership representative.
  • All existing partnerships and limited liability companies taxed as partnerships that do not have an Operating Agreement need to adopt an Operating Agreement that contains provisions dealing with the new partnership audit rules and that designates a partnership representative.
  • All new partnerships and limited liability companies taxed as partnerships should adopt an Operating Agreement with the new partnership audit provisions and should designate a partnership representative.

Hire Us to Amend or Prepare an Operating Agreement for Your LLC that Has Partnership Tax Audit Provisions & Names a Partnership Representative

We’ve made it very easy to hire us to amend an existing LLC Operating Agreement or prepare a new Operating Agreement. The first step to hire us is to go to our Buy an Operating Agreement page.

If you have questions about adopting or amending an LLC Operating Agreement, call LLC attorney Richard Keyt at 480-664-7478 or send an email to Richard at rickkeyt@keytlaw.com.  You may also call Richard’s son LLC attorney and former CPA Richard C. Keyt at 480-664-7472 and email at rck@keytlaw.com.

By |2017-06-20T17:37:49+00:00January 21st, 2017|LLC Tax, New Tax Audit Rules|

S Corporation Ignorance

For the umpteen time today a client told me about the client’s discussion with a person who does not understand the difference between the type of entity formed under the law of one of the fifty states vs. the method of income tax applied to the entity by the Internal Revenue Code of 1986, as amended. The ignoramus said, “My company insists that it enter into a contract with your company, but only if your company is an S corp.” My client’s company is an LLC, but the ignorant person thinks his company cannot enter into a contract with the LLC because the LLC is not an “S corporation.”

Too many people, including CPAs and lawyers, do not understand that when they say the entity must be an S corporation they are mixing two concepts: (i) the type of entity formed under state law, and (ii) the income tax method applicable to the entity under the Internal Revenue Code. Just today I downloaded the materials to a webinar I will watch later today. The lawyer who is teaching the webinar created reference materials that constantly use the phrase “limited liability companies vs. ‘S’ corporation.” The lawyer knows better, but falls into the trap of loose talk about S corporations.

Not one single state in the United States allows people to create an S corporation. The states allow people to create, sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, for profit corporations, nonprofit corporations, benefit corporations, and limited liability companies. The term “S corporation” refers to a method of federal income tax applicable to an entity under the Internal Revenue Code. After forming your entity under state law you must then decide the federal income tax method you want to apply to your entity. If Homer Simpson forms a for profit corporation in Arizona and an Arizona LLC, he can cause both entities to be taxed under Subchapter S of the Internal Revenue Code by timely filing an IRS form 2553. The federal income tax law applies exactly the same to the corporation and the LLC taxed as S corporations.

P.S. Timely filing the IRS Form 2553 means filing the form with the IRS within the first two and one half months of the entity’s existence or within the first two and one half months after the beginning of a calendar year.

For more on this topic see my article called “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?

By |2017-05-30T21:46:45+00:00December 29th, 2016|LLC Tax|

Can a Single Member LLC be Taxed as a Partnership?

Question: Can a single member limited liability company be taxed as a partnership for federal income tax purposes?

Answer: No. The following text from the IRS’ website answers the question:

“Over the years, there has been confusion regarding Single Member Limited Liability Companies in general and specifically, how they can report and pay employment taxes.

An LLC is an entity created by state statute. The IRS uses tax entity classification, which allows the LLC to be taxed as a corporation, partnership, or sole proprietor, depending on elections made by the LLC and the number of members. An LLC is always classified under federal law as one of these types of taxable entities.

A multi-member LLC can be either a partnership or a corporation, including an S corporation. To be treated as a corporation, an LLC has to file Form Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation. A multi-member LLC that does not so elect will be classified under federal law as a partnership.

A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity.” Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a “disregarded entity” which is taxed as a sole proprietor for income tax purposes.”

IRS Form 8832 is the form used by an entity to elect a method of federal income taxation that is different from the IRS’ default method (sole proprietorship or disregarded entity for single members LLCs and partnership for multi-member LLCs). This form is also known as the “check the box” form because an entity can elect a tax method by checking the box on the form. IRS Form 8832, question 3 reads:

Does the eligible entity have more than one owner?

Yes. You can elect to be classified as a partnership or an association taxable as a corporation.

No. You can elect to be classified as an association taxable as a corporation or to be disregarded as a separate entity.”

By |2017-05-31T07:46:30+00:00July 31st, 2016|LLC Tax, Single Member LLCs|

Changes to IRS Partnership and LLC Audit Rules

Bradley Arant Boult Cummings, LLP, Mark Miller: “The Internal Revenue Service’s (IRS’) ability to audit partnerships1 will be greatly enhanced due to changes made by the recent Bipartisan Budget Act of 2015 (Budget Act). The new rules apply to tax years beginning after 2017, which may seem far away, but partnerships need to use this time to prepare for the changes by amending their governing documents (i.e., partnership agreements and operating agreements), selecting a new “Partnership Representative” (PR), and making decisions that will affect internal operations for years to come. Speaking at a conference on March 15, IRS Chief Counsel William Wilkins confirmed that the IRS will be ramping up its partnership audit efforts. Congress projects these new procedures to generate more than $9.3 billion in new revenue over a 10-year period.”

The article concludes with this statement:

“A final warning: Anyone that is either (1) contemplating a new . . . business that will be classified as a partnership for federal tax purposes (including an LLC or joint venture) or (2) needing to amend an existing agreement should strongly consider incorporating these changes into the new or revised agreement immediately

Emphasis added.

By |2017-06-24T14:58:41+00:00April 21st, 2016|LLC Tax, New Tax Audit Rules|

Predicting How the New Partnership Audit Rules Will Affect S Corporations and Their Shareholders

The Journal of Passthrough Entities (CCH): “This column has three focal points: S corporations (of course!), the new partnership audit procedures”

The author of this article makes three predictions. His prediction number 2 deals with partnership agreements and operating agreements of LLCs taxed as partnerships. He predicts:

“PREDICTION #2:

Some partnership agreements will be revised and some new ones drafted to require S corporation partners to provide annually to the partnership an accurate list of the names and TINs of the S corporation’s shareholders (i.e., the persons to whom the S corporation is required to issue Schedules K-1 for the year).

Corollary: Some partnership agreements will provide that S corporation partners must indemnify the partnership and its other partners against either: (i) partnership-level income taxes the partnership is required to pay but could have avoided had the S corporation provided the information necessary for the partnership to elect out of the entity-level audit provisions on a timely basis, or (ii) the costs to the partnership of making an election under new Code Sec. 6226.”

By |2017-05-30T21:05:07+00:00March 30th, 2016|LLC Tax|

New IRS Audit Rules for Companies Taxed as Partnerships

Paul Hastings LLP, Thomas S. Wisialowski, Erika Mayshar and Noah Metz: “Hedge funds, private equity firms, real estate companies, and other businesses structured as partnerships or limited liability companies are paying close attention to recent changes in IRS audit procedures. . . . This means that under the rules described above, if a partnership filed a tax return and paid its taxes in year 1 (the year 1 tax return), partner X sold its interest in the partnership to new partner Y in year 2, and the partnership was audited in year 3 in respect of its year 1 tax return, then partner Y would bear its share of any additional tax liability assessed on the partnership in year 3 in respect of the year 1 tax return, despite that partner X, and not partner Y, was a partner in the partnership in year 1.”

The article states one of the most important reason that operating agreement of all LLCs taxed as partnerships must be amended to deal with the new audit rules:

“Partnership and LLC agreements should generally be revised to provide for who will act as the ‘partnership representative’ because in the absence of an appointed person, the IRS has the discretion to pick a ‘partnership representative.’

By |2017-06-24T15:00:59+00:00March 28th, 2016|LLC Tax, New Tax Audit Rules|

New Tax Audit Regime

Taft Stettinius & Hollister LLP, Todd C. Lady and Lourdes E. Perrino: “On Nov. 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the “Act”). The Act dramatically changes the way the IRS will conduct partnership audits going forward and, in turn, likely will have far reaching implications on how partnerships, including funds, conduct operations in the future. . . . Although these rules have not yet taken effect, they should be taken into account when drafting new operating agreements or engaging in acquisitive transactions involving partnerships. Operating agreements should include procedures that address the option to elect to pass any adjustment on to the reviewed-year partners. Additionally, partners should clearly define their respective rights to notice and participation during an audit and carefully select the partnership representative that will have the authority to bind the partnership.”

By |2017-06-24T15:03:45+00:00February 8th, 2016|LLC Tax, New Tax Audit Rules|

New Partnership Audit Rules Require Careful Review of Partnership and LLC Agreements

Cozen O’Connor, Richard J. Silpe”If you are a partner of a partnership or a member of a limited liability company (LLC) taxed as a partnership, or are entering into a new partnership or LLC, you may have some important decisions to make in light of impending changes to the rules governing federal tax audits. . . . These new rules will lead to new provisions in partnership and LLC agreements and amendments of existing agreements to, among other things, designate a method for selecting a partnership representative and its rights and obligations of the partners, address whether certain tax elections will be made, and provide for indemnification and other contractual provisions (e.g., in the case of a withdrawing partner).

By |2017-06-24T15:07:35+00:00January 26th, 2016|LLC Tax, New Tax Audit Rules|

Comprehensive Partnership Audit Reform Requires Amending LLC Operating) Agreements

Kilpatrick Townsend & Stockton LLP, James E. Brown, Heather L. Preston, Lynn E. Fowler and Charles E. Hodges II “Congress has recently scrapped the existing procedures for IRS audits of partnerships. The new rules (the “BBA Audit Rules”1) are effective for partnership taxable years beginning on or after January 1, 2018. A partnership that fails to address key concepts of the BBA Audit Rules could make a partner indirectly liable for federal income tax of the partners assessed for a year prior to becoming a partner. Almost all partnership (and LLC operating) agreements will need to be amended at a minimum to clarify which partners will be liable with respect to audit adjustments asserted by the IRS.”

By |2017-06-24T15:09:30+00:00December 22nd, 2015|LLC Tax, New Tax Audit Rules|

New Audit Rules Require Changes to Partnership and LLC Operating Agreements

Holland & Knight LLP, William B. Sherman and Daniel L. Janovitz: “The Bipartisan Budget Act of 2015 (P.L. 114-74) includes a complete overhaul of the procedures that apply to Internal Revenue Service (IRS) audits of partnerships, including limited liability companies (LLCs) taxed as partnerships and their partners. . . . . Issues that Partnerships Need to Address . . . . 1. Existing partnership and LLC operating agreements should be reviewed, and amendments will need to be drafted to address aspects of the new rules, including:

  • designating the partnership representative in place of the TMP
  • determining the partner(s) that will control the decision to opt out of the new regime
  • preventing assignments of partner interests to persons that would preclude the ability to opt-out
  • addressing the payment of entity-level tax
  • committing to making certain elections in the event of an audit adjustment
  • addressing circumstances where partners agree to “adjusted information returns” in lieu of entity-level tax

2. Negotiations will be necessary to determine the appropriate partnership representative and the contractual limitations on the authority of such representative.

By |2017-06-24T15:12:16+00:00December 21st, 2015|LLC Tax, New Tax Audit Rules|

New Partnership Tax Audit Rules Require Changes to Operating Agreements

Dykema Gossett PLLC, Jeffrey A. Goldman, Steven E. Grob, Anthony Ilardi, Jr., William C. Lentine and Robert W. Nelson: “On November 2, President Obama signed the Bipartisan Budget Act of 2015 (the “Act”), which significantly changes the procedures for tax audits of partnerships. . . . The sweeping changes in the realm of partnership tax audits will likely require revisions to most partnership agreements and new considerations when entering or leaving a partnership.”

See the end of the article for a list of changes to make to operating agreements and partnership agreements.

By |2017-06-24T15:16:32+00:00December 18th, 2015|LLC Tax, New Tax Audit Rules|

New Audit Procedures for Partnerships Create Potential Entity-Level Liabilities

Venable LLP, Brian J. O’Connor, Norman Lencz, Michael A. Bloom and Christopher S. Davidson:  “On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the Act). The Act significantly changes how partnerships (including LLCs taxed as partnerships) are audited by the IRS. . . . As a result of changes made to the Internal Revenue Code by the Act, partnerships may now be directly liable for any tax deficiency resulting from an adjustment to partnership items (e.g., income, gain, loss deduction and/or credit). Thus, the current partners in a partnership could bear economic responsibility for improper tax reporting in prior years, even if one or more of such partners was not a partner in the year in which the improper reporting occurred.”

This article includes the following statement:

“existing partnership agreements should be reviewed to account for these new audit procedures”

I agree.  I recommend without exception that all existing LLCs taxed as partnerships amend their Operating Agreements to cover the issues created by the Bipartisan Budget Act of 2015.  LLCs that are taxed as partnerships that do not have an Operating Agreement should adopt an Operating Agreement that contains language that deals with the issues created by the BBA.

By |2017-06-24T15:21:25+00:00December 17th, 2015|LLC Tax, New Tax Audit Rules|

Bipartisan Budget Act of 2015 Introduces New Partnership IRS Audit Rules

Akerman LLP, Donald K. Duffy:  “Effective for partnership tax years beginning after 2017, the Bipartisan Budget Act of 2015 repealed the current partnership audit rules and replaced them with rules described in general terms below. Partnerships can also elect to apply the new rules sooner to partnership tax years beginning after the date of the Act’s enactment. In brief, the major change is that the partnership itself can be liable for federal income tax in the tax year the audit adjustments become final. The partners in that year bear the economic burden of the tax and not the partners in the earlier tax year under audit and with respect to which the adjustments are made. Since partnerships can elect to apply these new rules earlier than 2018, some extra diligence is needed now in the acquisition of partnership and LLC interests.”

This article lists eight partnership tax issues that should be addressed in partnership agreements and operating agreements of LLCs taxed as partnerships.  Bottom line:  If your existing or new LLC is or will be taxed as a partnership it must have an operating agreement that includes language that addresses the issues created by the Bipartisan Budget Act of 2015.

By |2017-06-24T15:26:46+00:00December 4th, 2015|LLC Tax, New Tax Audit Rules|

Budget Act Creates New Partnership Tax Audit Regime

Drinker Biddle & Reath LLP, Stephen D.D. Hamilton, David Shechtman and Jonathan D. Grossberg: “Although the new rules under the Budget Act will first apply to returns filed during 2019 ( i.e., for a partnership’s 2018 taxable year), partnerships and their advisors need to plan now for these eventual changes. Anyone entering into a new partnership agreement or acquiring an interest in an existing partnership should focus on what tax audit rights, and what tax representations and covenants, to seek. Partners of “small partnerships” should consider whether to bind themselves to the election-out procedures and whether to adopt transfer restrictions that will insure that the election-out remains available. Existing partnerships should begin consideration of the procedures for designating the PR and whether to utilize the alternative regime for allocation of assessed tax liability back to the partners in the Audit Year.”

By |2017-06-24T15:32:47+00:00November 30th, 2015|LLC Tax, New Tax Audit Rules|

Partnership Audit Reform: New Partnership-level Tax Impacts Partnerships & LLCs

Kaye Scholer LLP, David A. Sausen, Willys H. Schneider and Zeno Houston:  “The Bipartisan Budget Act of 2015 (the Budget Act), which was signed into law on November 2, 2015, has dramatically reformed how the U.S. Internal Revenue Service (IRS) will assess and collect taxes from partnerships, including limited liability companies (LLCs) treated as partnerships for tax purposes. . . . Accordingly, absent the exercise of an election as described below, the New Audit Rules can result in the imposition of an entity-level tax on the partnership as a result of audit adjustments. This heralds a significant change from the existing partnership audit procedures”

The authors state:

All partnerships will need to consider appropriate revisions to existing partnership agreements—preferably, long in advance of the Effective Date

By |2017-06-24T15:35:16+00:00November 20th, 2015|LLC Tax, New Tax Audit Rules|

Partnership Audit Reform Passed into Law

Ropes & Gray LLP:  “On Monday, November 2, President Obama signed the Bipartisan Budget Act of 2015 (the “BBA”) into law, effecting sweeping changes to the rules governing audits of entities treated as partnerships for U.S. federal income tax purposes. The new rules can be expected to increase partnership audit rates by making audits and related tax assessments more efficient for the IRS, including by imposing an entity-level tax on the partnership on audit adjustments, absent an election (described below) to shift tax liability to partners. The new rules constitute a stark change from existing law

The authors said the partners of a partnership and the members of an LLC taxed as a partnership should take the following action:

“Revision of partnership agreement provisions addressing the sharing among the partners of any partnership-level tax and related items.”

The authors described six other issues that partnerships and LLCs taxed as partnerships must consider.

By |2017-06-24T15:41:09+00:00November 9th, 2015|LLC Tax, New Tax Audit Rules|

New Tax Audit Rules: a Big Deal for LLCs Taxed as Partnerships

Shearman & Sterling LLP, David S. Raab, Julie M. Marion and Thomas H. Halpern: “Existing partnerships should review operating agreements before new rules take effect.  The Bipartisan Budget Act of 2015 (the Act), which President Obama signed on November 2, upends the way the Internal Revenue Service (IRS) conducts partnership audits, with potentially far-reaching effects. . . . Small partnerships will have to decide whether they want to elect out of the new regime, thereby weakening the ability to control consistent partner reporting.  Partnerships that do not elect out or that are ineligible to elect out will need to ensure their operating agreements address the new procedural requirements, such as addressing whether the partnership is required to elect to pass-through audit adjustments to the partners or who will have the authority to make that decision.

By |2017-06-24T15:38:35+00:00November 9th, 2015|LLC Tax, New Tax Audit Rules|

New Partnership Audit Rules Radically Alters Federal Partnership Income Tax

Sutherland Asbill & Brennan LLP, Thomas A. Cullinan, Sheldon M. Kay , Daniel R. McKeithen, David A. Roby, Jr., Amish M. Shah and H. Karl Zeswitz: “On November 2, 2015, President Obama signed the Budget Act of 2015 (the “2015 Budget Act”), which makes significant amendments to the procedural rules governing federal income tax audits and judicial proceedings that apply to partnerships and other entities (such as limited liability companies or statutory trusts) classified as partnerships for federal income tax purposes. . . . existing partnerships and their partners will also need to consider the extent to which the new rules will necessitate amendments to their partnership agreements to preserve their existing arrangements.”

By |2017-06-24T15:45:28+00:00November 5th, 2015|LLC Tax, New Tax Audit Rules|

How Much Compensation must an Entity Taxed as an S Corporation Pay to Owners to Keep the IRS Happy?

The Tax Advisor: “S corporation shareholders [and owners of LLCs taxed as S corporations] generally prefer dividend distributions of their S corporations’ [or LLC’s] profits over compensation payments from the S corporations [LLCs] because the compensation payments are subject to payroll taxes and dividend distributions are not. To prevent S corporations and their shareholders from avoiding payroll taxes by maximizing distributions and minimizing compensation payments, the IRS requires S corporations to pay shareholders who provide substantial services reasonable compensation. Disputes between the IRS and taxpayers have required courts to determine on a regular basis whether an S corporation has paid reasonable compensation to its shareholder(s). Two recent district court cases provide a framework that advisers can use to determine whether the IRS and the courts will consider a shareholder’s compensation reasonable.”

By |2017-05-31T07:49:41+00:00August 23rd, 2011|LLC Tax|