Discussion:Are tax returns required for an LLC that has not started to conduct business?

which has been elected to be taxed as a partnership that has not started to conduct business, and thereby has no income?

For state returns in Delaware, it doesn't appear required: http://revenue.delaware.gov/services/current_pit/TY08_300i.pdf A PARTNERSHIP RETURN MUST BE COMPLETED BY ANY BUSINESS TREATED AS A PARTNERSHIP FOR FEDERAL PURPOSES WHICH HAS ANY INCOME OR LOSS, REGARDLESS OF AMOUNT, DERIVED FROM OR CONNECTED WITH A DELAWARE SOURCE. IF THE PARTNERSHIP HAS NO DELAWARE SOURCED INCOME OR LOSS, NO RETURN IS REQUIRED TO BE FILED UNLESS YOU HAVE DELAWARE RESIDENT PARTNERS.

And the instructions for IRS 1065 state under domestic partnerships, http://www.irs.gov/pub/irs-pdf/i1065.pdf "Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes."

But it also states: "Entities formed as LLCs that are classified as partnerhips for federal income tax purposes must file Form 1065."

How would you interpret the last line? Is it merely pointing out that LLCs classified as partnerships should use Form 1065? Or is it trying to state that all LLCs, regardless of whether it receives income, should file Form 1065?

Lizzit

and their concern about becoming profitable within 3 years, I would like to advise them to avoid the hassle of dealing with the not-for-profit test in IRS 535. They do believe they can achieve profitability in time, but have concerns about the near future, especially given the current economic climate.

Do you mind if I howl for a bit? LOL

But seriously, did any part of the LLC/partnership's business activity begin this year? If so, there's a deemed election, I think, to deduct and maybe also amortize start-up expenditures, which becomes an "expense" - I think - that requires the filing of a return, I think, for the year, I think. Beginning business is very hard to define - may thus indirectly require that a return be filed. And the statement that said that LLC/partnership should file Form 1065 was saying just that: they should use Form 1065 *if* they're required to file and do file a return.

The reason why it may be better to NOT file a tax return is that there is a very high probability that my client will fail the presumption of profit test within the first 3 years. It may be more hassle dealing with a potential audit than not filing, especially if my client is willing to pass on deducting a few hundred dollars for tax year 2008. (Not filing would only make sense, of course, if he could properly define the start of his business to when he starts selling his product.) It would buy my client an extra year to start making a profit, and hopefully start passing the presumption of profit test from the 4th year onwards. I know the profit test isn't a hard and fast one, but who wants to deal with proving that to the IRS?

"Presumption of profit. An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year." 535

"Beginning business is very hard to define - may thus indirectly require that a return be filed. And the statement that said that LLC/partnership should file Form 1065 was saying just that: they should use Form 1065 *if* they're required to file and do file a return." Thanks Harry.

There was no attempt to start selling the product in 2008, because there was no product to sell. There were no employees, just 2 partner/members in the LLC. Since there is no product to sell, and active development has not started on the product, the only costs that this team incurred was the cost to start up the LLC and the registered agent fees. Therefore, there was no income. This team hopes to being actively development on the product this year, and start selling their product in 2 years.

Regarding the following lines:

Harry: "Well, there's twist!"

IRS: "every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes."

I would interpret 1065 to mean that if you received income, you are, of course, required to file. However, I would interpret "... incurs any expenditures treated as deductions or credits" to mean that, if you're willing to pass on taking advantage of any deductions, haven't made any income, and haven't started to try to make a profit yet, then you are not required to file.

Again, there was no income, or attempt to try to make any kind of profit this year. Failing presumption of profit would be more of a hassle than not filing, I think.

Any thoughts?

What's the per month per partner penalty these days for not filing a required partnership tax return? But I'm not saying this one is required, ok?

Yes, my client paid the $250 Delaware LLC tax for 2009. As the Delaware LLC was formed in January 2008, the Delaware LLC tax did not apply in the year of formation.

Hi Sandysea, Deback, and Harry,

If it is legally required to file (ie. if my client is legally REQUIRED to deduct allowed expenses), then I will indeed inform my client that filing for 2008 is necessary, regardless of an absence of income or attempt to make a profit in 2008. They may have to deal with the presumption of profit under 535 at a later point, but if filing is required, then they have no choice.

I wouldn't be concerned that the company didn't show a profit for 2008, if the company was certain to start making a profit in 2010. However, I am concerned that if the company doesn't show a profit in 2010, 2011, and 2012, then they will fail the presumption of profit test in 535, and face the possibility of an audit to retain for-profit status.

The INTENT needs to be there.

But again, I emphasize that we can't just decide NOT to deduct things that should be deducted to save on future exposure...imho that is :)

> If the LLC has an EIN, the IRS will look for a tax return. > Thank you. The answer is clear then. I'll advise my client to file.

Hi Harry and Sandysea,

Thanks. Its good to know that showing a profit motive is easy.