LLC tax strategies

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Naturally I have read all LLC threads but haven't seen one on tax issues. Let's get one going.

Here's my first idea: I'm forming a new LLC which will be managed by myself and one other person. Since we will be active in the business, I believe this means the two of us will be required to pay self-employment taxes on the profits we take out of the LLC. So...what if we also list our wives as members, have them make a capital investment in the business, but not be active in the business so that they will receive funds as profits that won't be subject to self-employment taxes? Of course this won't save us anything in overall income taxes since we file jointly anyway, but it will save on self-employment withholding taxes.

This sounds like a failry obvious loophole but none of the material (all the Nolo books on the issue, and others) I've read has mentioned spouses at all (other than their consent signature on operating agreement).

Can one get away with such a strategy? What's to prevent us from having our wives start the LLC and simply we husbands at low salaries, we do all the work, and then our wives collecting profits that are only taxable as income not employment taxes. For example: $100k is the annual profit, minus like $20k for two small salaries to the husbands (on which we pay self-employment taxes), and then each wife gets $40k distribution as profit that just gets factored in to the overall income tax of the wife-husband couple.


"Limited partners" are subject to employment taxes if they receive guaranteed payments but not if they receive profit shares. Unfortunately, the Internal Revenue Code does not define "limited partner." There were, once, proposed regulations that defined the term to consider factors such as participation in management, but I believe they were withdrawn and cannot be relied upon.

If you form a statutory L.P., with, say, an S corporation as the sole general partner earning a guaranteed interest and the profits paid out to all the individuals as limited partners, you should be safe not paying any employment taxes. Or, you could treat LLC members as "limited partners" on the basis that they are not personally liable for the partnership's debts. This is an aggressive position, but at least arguably justifiable (and, in my opinion, actually correct) and so unlikely to attract negligence penalties.

Note that avoiding employment tax also means not earning social security credit, which might not make it a smart strategy (though it definitely is smart if you would, say, be at the max benefit by retirement in any case).

LH2004, Esq.

I have an LLC registered out of Delaware, but based in TN. My 2 cents is to advise a CPA and/or tax lawyer who's cognicent of the tax laws in your state, and if different, state of registry.

The words "IRS Audit" aren't 4 letter words, but they should be. Avoid at all cost.

LH2004 said: [Q]"Limited partners" are subject to employment taxes if they receive guaranteed payments but not if they receive profit shares. Unfortunately, the Internal Revenue Code does not define "limited partner." There were, once, proposed regulations that defined the term to consider factors such as participation in management, but I believe they were withdrawn and cannot be relied upon.

All the books seem to mention the participation as being a deciding factor(siting proposed treasury regulation section 1.402(a)-2(h)(2) and following), but perhaps those are the proposed regulations that you mentioned have since been withdrawn. Since my business partner and I will be heavily participating, we figure we're stuck paying self-employment taxes. Perhaps it would look too fishy if the husbands had no capital interest in the LLC and were simply employees. But maybe we can, for example, put in $10k each husband, $10k each wife and then at least 50% of our profits coming out could avoid self-employment taxes (the 50% paid out to the wives.

I'll read up more on Manager-Managed LLCs and report back and see if they feel two guys having their wives make half of their capital investment and remaining non-managing members (and thus exempt from employment taxes) is an acceptable practice.

Thanks for the feedback guys. Naturally I will run this all by my CPA and Attorney (who is himself also a CPA) before filing the paperwork but I just want to get some information together to better explain to him my strategy (so we don't sit there for hours running up a large bill...)

Please illuminate us after running the meter with your "trusted" advisor. I really enjoy second-guessing colleagues.

You could always try "first guessing" them and let me know what you think first, ha! (with the meter off of course and I realize I'd be getting what I paid for).

Sorry. No free samples today, Buddy.

I got a question relating to this. I am a partner(silent) in a company. My accountant told me it would be better for me to be a part owner of the company so I could write off expenses and get 100% credit. Now I am just buying stuff and writing it off on my personal taxes (mostly tools, its a electrical company, and some software) My partner asked his accountant and he said I should leave it as it is in case the company disolves, so all the stuff I have bought would not be taken.

Now for the money part, I take 20% of the profit on the jobs(ranging 2k-10k for now) my partners accountant told him to just give me the money and I pay taxes on it. I think there are better ways around this, I suggested he make me a 20% owner and pay me dividends. I hope this is not to confusing....

Chris

chrsb said: [Q]I got a question relating to this. I am a partner(silent) in a company. My accountant told me it would be better for me to be a part owner of the company so I could write off expenses and get 100% credit. Now I am just buying stuff and writing it off on my personal taxes (mostly tools, its a electrical company, and some software) My partner asked his accountant and he said I should leave it as it is in case the company disolves, so all the stuff I have bought would not be taken.

Now for the money part, I take 20% of the profit on the jobs(ranging 2k-10k for now) my partners accountant told him to just give me the money and I pay taxes on it. I think there are better ways around this, I suggested he make me a 20% owner and pay me dividends. I hope this is not to confusing....

Chris

Well, could you provide a bit more information so we can help you with the decision. What sort of business structure is it run as (partnership, llc, s corp, etc)? And when you became a partner, was there an agreement signed or did you invest some money and get some stock in the company?

As for buying stuff and expensing it via the company. Generally not a good idea, but could you give more information?

i own an LLC with a friend of mine. i do the sales, he runs support. when i filed with the IRS, i spoke with the woman on the phone ( i love how they say, this is Mrs. Smith , or whatever and not their first name) and the information i got was that if we do not have any othe rpeople in our companies, and we dont care about SS, that we can list that there are no exployees in the company, and that we as owners take a certain % of the profits. in this way, we would only need to file the money based on our own tax bracket and not under any self employment tax or anything. anyone care to comment on this?

my company has developed software and we sell it with hardware for liquor/convenience stores or check cashing stores that cash checks. its essentially a check management program that keeps track of customers' checks in case they bounce and provides reports, in case someone needed to kno what we do. thanks

The accuracy rate for IRS CSRs is low for anything other than routine (when are taxes due, etc.) questions. And, come audit time, the IRS will not stand behind the statements of its telephone CSRs.

Merez said: [Q]chrsb said: [Q]I got a question relating to this. I am a partner(silent) in a company. My accountant told me it would be better for me to be a part owner of the company so I could write off expenses and get 100% credit. Now I am just buying stuff and writing it off on my personal taxes (mostly tools, its a electrical company, and some software) My partner asked his accountant and he said I should leave it as it is in case the company disolves, so all the stuff I have bought would not be taken.

Now for the money part, I take 20% of the profit on the jobs(ranging 2k-10k for now) my partners accountant told him to just give me the money and I pay taxes on it. I think there are better ways around this, I suggested he make me a 20% owner and pay me dividends. I hope this is not to confusing....

Chris

Well, could you provide a bit more information so we can help you with the decision. What sort of business structure is it run as (partnership, llc, s corp, etc)? And when you became a partner, was there an agreement signed or did you invest some money and get some stock in the company?

As for buying stuff and expensing it via the company. Generally not a good idea, but could you give more information?



It is a S corp, and I am not officialy a partner. I am the license holder(its a electrical company). When the company first started I was advising on the side, but now I am a full time employee. I loan the company money for wholesale house bills, I am the estimator for the company. I also run the jobs and make alot of the decisions. I could careless about the % ownership unless I could profit from it. The company can not do bussiness without my license. I have bought furniture to do the estimating, computer, software and some other stuff.

My "partners" accountant told him it was better for the company to just reinburse me for my expenses. My accountant told me it would be better to be a % owner to write off more stuff(ex. car expenses, dividends) If it is the same either way I would rather leave it as is(me being silent on paper) but if I could profit I will talk to him about making me a percent holder.

Doonie said: [Q]i own an LLC with a friend of mine. i do the sales, he runs support. when i filed with the IRS, i spoke with the woman on the phone ( i love how they say, this is Mrs. Smith , or whatever and not their first name) and the information i got was that if we do not have any othe rpeople in our companies, and we dont care about SS, that we can list that there are no exployees in the company, and that we as owners take a certain % of the profits. in this way, we would only need to file the money based on our own tax bracket and not under any self employment tax or anything. anyone care to comment on this?

my company has developed software and we sell it with hardware for liquor/convenience stores or check cashing stores that cash checks. its essentially a check management program that keeps track of customers' checks in case they bounce and provides reports, in case someone needed to kno what we do. thanks

Yeah, I'm with the other poster on this, the advice you got from the csr really willn't fly with the IRS. And if you have no employees, who sells the product then? Until it markets itself, fully automated, and I reall doubt it, someone works. Meaning if you or your partner are doing business in the name of the company, you're employees and must pay the taxes... As well as taking a certain % of the profits is a bit unusual and maybe a flag for the irs or auditors.

Sure, you could just elect to be taxed as a corp instead of a partnership and then distribute the after tax profits to get around the fica and ss taxes, but if you do, mostly likely the irs will flag you both as employees in fact, and say that, hey, you are actually employees and need a wage (comparable with similar jobs in the area) and all those nice tax savings you thought you were getting will be ruled as wages, subject to the higher tax rates as well as having penalties added on... Of course, this is just what I have seen happen and doesn't mean it will to you, nor is this advise one way or another (read: covering my butt)

[Q]chrsb said:
My "partners" accountant told him it was better for the company to just reinburse me for my expenses. My accountant told me it would be better to be a % owner to write off more stuff(ex. car expenses, dividends) If it is the same either way I would rather leave it as is(me being silent on paper) but if I could profit I will talk to him about making me a percent holder.

Okay, so let me get this straight, it's an S corp, you haven't contributed capital to it's startup, but you do loan it money from time to time, right? And basically, if not for you, the company would be out of work, since they need your license and insurance, right?

A few things, first, S corps are taxed as pass through entities, hence, no dividends, since the income and loss are split (either proportionally or by agreement) among the owners on their Sch C. Either way, if you're a shareholder or just an employee you can still write off some business expenses, the difference is just where (either your Sch A or your Sch C). Pretty much right off the bat, it's better to be able to write it off on the Sch C, since you also still get your personal/standard deduction. And it depends on more, do you intend on keeping the equipment or your own use, or it is just for the business? I mean, if it's just for the business, you can get a company cc and just charge it to that instead of having to deal with reimbursement.

Thought truthfully, the accountants seem to have it pretty right, since that's what they do, as well, as I would need much more information than a message board can provide to give a decent opinion on the matter

Thank you for the input! We are still working out kinks. The company is only 2 years old and we are still debt free and profitable so we can't be doing to bad. Some people say C corp is a better way to go, some say S. I guess its all who you talk to.

Merez said: [Q]Doonie said: [Q]i own an LLC with a friend of mine. i do the sales, he runs support. when i filed with the IRS, i spoke with the woman on the phone ( i love how they say, this is Mrs. Smith , or whatever and not their first name) and the information i got was that if we do not have any othe rpeople in our companies, and we dont care about SS, that we can list that there are no exployees in the company, and that we as owners take a certain % of the profits. in this way, we would only need to file the money based on our own tax bracket and not under any self employment tax or anything. anyone care to comment on this?

my company has developed software and we sell it with hardware for liquor/convenience stores or check cashing stores that cash checks. its essentially a check management program that keeps track of customers' checks in case they bounce and provides reports, in case someone needed to kno what we do. thanks

Yeah, I'm with the other poster on this, the advice you got from the csr really willn't fly with the IRS. And if you have no employees, who sells the product then? Until it markets itself, fully automated, and I reall doubt it, someone works. Meaning if you or your partner are doing business in the name of the company, you're employees and must pay the taxes... As well as taking a certain % of the profits is a bit unusual and maybe a flag for the irs or auditors.

Sure, you could just elect to be taxed as a corp instead of a partnership and then distribute the after tax profits to get around the fica and ss taxes, but if you do, mostly likely the irs will flag you both as employees in fact, and say that, hey, you are actually employees and need a wage (comparable with similar jobs in the area) and all those nice tax savings you thought you were getting will be ruled as wages, subject to the higher tax rates as well as having penalties added on... Of course, this is just what I have seen happen and doesn't mean it will to you, nor is this advise one way or another (read: covering my butt)

well ok, this is how it works. we sell the product, and we do the support on it. so i mean we arent getting ANY income unless the system is being sold. so couldnt we just be 100% commission? i guess what im wondering is, what would be the best tax way to go in this. after taking out the expenses related with each system, the profit gets distributed into accounts to further the life of the company. the remaining percent of the profits are equally distributed to each of us. basically, (working with easy numbers here, the system is actaully more expensive than this) lets say each system sells for 1000. 500 of it is the cost of the computer and related peripherals. the other 500 would be split by percentages into a marketing/advertising fund, money would remain in the bank to be able to buy computers and peripherals when needed, a certain amount would be required to be on the side to pay for cell phone bills, then theres the whole paying ourselves back for capital investments. it wont be for after a number of sales that we'll actually be fully profitable, but even then each of us will only take about 20% of the profits. i guess when we are doing it this way, should we be setup to take it at the self employment tax rate? be taxed a different way? on a side note, should we be paying any tax to the government aside from sales tax as far as the LLC itself is concerned? because wouldnt income tax be required to be paid by me? i guess im still at a loss as to how im gonna do the SS thing... any input is appreciated as usual = )



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