Discussion:S-corp SE income from LLC
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Discussion Forum Index --> Tax Questions --> S-corp SE income from LLC
GorillaBall (talk|edits) said: | 5 June 2009 |
| I have a client that is an member of 3 LLC's that have previously reported business income as SE income to him on their K-1's. My client wants to set up an S-corp and contribute his ownership interests in these three LLC's to the S-corp. If he does this will the income from the LLC's flow through the s-corp to him individually as SE income or non-SE income as is normally true with S-corp income? | |
| 5 June 2009 | |
| I'm not sure, just thinking out loud, but sounds like turning lead into gold to me. If it is SE income in the LLC, wouldn't it retain its character as it flows through the S-Corp to the shareholder? | |
GorillaBall (talk|edits) said: | 8 June 2009 |
| Sounds too good to be true to me also, that's why I wanted to bounce it off some of you out there. | |
| 8 June 2009 | |
| If the other members of the LLC agree, why not elect to be taxed as an S corp? Just put your client on reasonable salary and the rest flows thru to your client on a K1. | |
| 9 June 2009 | |
| Could the IRS use the Subchapter K anti abuse rules to create SE income (Reg 1.701-2)? This seems like a stretch (for the IRS) but perhaps the IRS could create guaranteed payments/ reclassify distributions to S corp as guaranteed payments to your client?
Or could the IRS attribute your client's efforts in operating/working for those LLC's to your client's efforts as an S corporation employee (who should receive reasonable compensation IF your client actually is actively involved in the businesses of the LLCs)? The format your client has suggested seems to save on “contributions” to the Social Security Administration without having to consider a “reasonable” amount of compensation. Especially if the S corporation makes no distributions to your client or perhaps bunches distributions every x years. | |
| June 9, 2009 | |
| No, they cannot use Subchapter K anti-abuse rules to attack any strategy that doesn't involve abusing Subchapter K.
If there are distributions, there is a risk of recharacterization as salary. If there aren't, the recharacterization would have to be as phantom salary deemed paid out and then recontributed, which would be an extraordinarily difficult case for the IRS to make. Employment taxes are due when wages are paid (as determined in accordance with standard tax principles). No wages, no employment tax, whether or not there is work being done. | |
| 9 June 2009 | |
| What you have descibed sounds a lot like some medical practices I have worked on. The doctor sets up an S-Corp, then the S-Corp becomes a member of the medical practice (LLC, partnership, etc.) The medical practice pays the S-Corp, and then the S-Corp pays a resonable salary to the doctor. At the end of the year, the S-Corp pays a distribution. The distribution portion has no self-employement tax, but the salaried portion does. | |
