Discussion:Multi-Member LLC sole-owner of another LLC
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Discussion Forum Index --> Advanced Tax Questions --> Multi-Member LLC sole-owner of another LLC
Discussion Forum Index --> Tax Questions --> Multi-Member LLC sole-owner of another LLC
| 10 November 2009 | |
| I have a situation where a multi-member LLC is the sole member of another LLC. The aforementioned tax entity structure is the default for both (the MMLLC=parnership, SMLLC=disregarded entity). Therefore the activity from the SMLLC will be part of the MMLLC 1065 return. Are there any concerns (related-party or other) with the SMLLC contracting with the MMLLC and paying the going rate of the MMLLC? Do you have any specific code or tax law to reference? | |
| 10 November 2009 | |
| I'm fairly certain that somewhere under 267(b) it says that if a taxpayer owns more than 50% of a PS or Corp, they are treated as related parties. Generally, this means that losses are not recognized and gains may be recharacterized as ordinary. | |
| November 10, 2009 | |
| There's no application of sec. 267 because the single-member LLC is disregarded. Transactions between it and its member don't have any tax consequences. | |
| 10 November 2009 | |
| Thanks for the quick responese. I failed to mention in this case the MMLLC is going to be constructing an asset for the SMLLC so there would be some tax effect as the MMLLC will have income and the SMLLC will have a depreciable asset. | |
| November 10, 2009 | |
| As far as federal taxes are concerned, the multi-member LLC will have an asset, and any income or expenses it generates; payments from the single-member LLC are as inconsequential as when I move money from my checking account to my savings account. | |
| 10 November 2009 | |
| LH2004 your comment makes perfect sense. The thing I'm not certain of is if it's fine that the MMLLLC charges the SMLLC it's going hourly rate or will the IRS look at this as a related party issue or other?
To provide a little more detail and the root of my concern. MMLLC was contracted by SMLLC to construct property which will be eligible for an energy credit. Therefore 30% of the cost basis is eligible for a credit (or a 1603 payment in lieu of the credit). I want to make sure it's legitimate for the cost basis to include amounts billed by MMLLC to the SMLLC at the regular billing rate. This is a legitimate transaction between the companies but I'm wondering if the IRS may feel otherwise (especially with the credit on the table). I'm hoping that as long as MMLLC charges their usual rate there will be no issue with the common ownership. | |
| November 10, 2009 | |
| Again: from the tax system's viewpoint, the single-member LLC isn't there at all. The amount of any payment between that company and its single member is completely irrelevant. The multi-member parent will own the asset; its basis will be the amount that it spends to acquire the asset, including any payments by its single-member arm, but not anything that happens between it and its own arm. | |
| 10 November 2009 | |
| Thanks for sticking with me. I think we're just missing each other on this one. The entire transaction is between the MMLLC and the SMLLC (both the MMLLC and SMLLC have their own bank accounts and business activity/purpose). In my example there are no payments getting made outside of the SMLLC/MMLLC. The plan is for MMLLC to bill SMLLC for the work it performs. Your last sentence ends "but not antying that happense between it and it's own arm." So are you saying that SMLLC can't hire and pay the MMLLC to construct the asset? This is what I'm trying to find out.
I found an article stating that a SMLLC of a parent MMLLC is treated as a division of the parent MMLLC. Is there any reason a division can't charge the parent? Or perhaps this is allowable as long as the charge is reasonable. | |
| 10 November 2009 | |
| Josh, it may help to think of this in terms of branch accounting. For income tax purposes the subsidiary LLC is treated as if it were a branch of the parent LLC. So while you could calculate a separate P&L for the parent and one for the sub, for tax purposes you would merge them, as you would a branch of a corporation. "Interbranch" charges and expenses are eliminated. So it makes no difference how much the sub charges the parent or vice versa, because those charges and payments simply don't exist for tax purposes.
So the answer to your question is as LH said: the cost of the property, on which the energy credit is based, is the amount paid by the combined entities TO THIRD PARTIES (including their own employees, if any). Transactions between the two entities will not be reported anywhere for tax purposes. You cannot gross up the tax basis of the property by means of inter-entity payments. You'd have had a better shot at it if the LLC that will own the building were a sister rather than the parent or subsidiary of the contractor. Then you'd have a related party issue, but the intercompany charges wouldn't simply disappear, as they do in the structure you have. | |
| 10 November 2009 | |
| In response to your last post: Of course one division of a corporation can charge another division for its services; however, those charges are recorded only for internal accounting (e.g., cost center) purposes. Transactions between divisions of a corporation are eliminated before they ever hit the corporation's P&L and balance sheet.
Bottom line is, you can't gross up your cost basis by dealing with yourself. | |
| 10 November 2009 | |
| Thank you KatieJ that truly clarifies this. Would your answers change if they were two separate S-Corps with common ownership? Or an S-Corp and a MMLLC with commmon ownership? Is the concern with the common ownership or that the SMLLC is disregarded and reporting on the parent MMLLC return? Also, any code reference on this? | |
| 11 November 2009 | |
| As I suggested above, you'd have a better argument if the entities were brother-sister LLCs or S corps. You'd still have a related party issue under Sec. 267 and possible reallocation of income and expenses under Sec. 482. But the intercompany charges wouldn't simply fall out of the computation, as they do with the disregarded entity structure.
As for authority, read the "check the box" regulations (Sec. 301.7701-3). If you are going to work with LLCs, you need to know those regs like the back of your hand. | |
