Posted in tax
A recent tax court case involving a married couple and one additional member further highlighted the difficulties in classifying income from an LLC as passive income. The wife was given the
membership in the LLC, rather than her husband, because her credit was better
and it was used to secure loans. Her husband provided management services. The
LLC reported payments made to the taxpayers during the years in question as
guaranteed payments. However, on the couple's personal returns, the wife
reported the amounts she received as partnership distributions that were not
subject to self-employment tax because of her limited involvement in the LLC's
operations. The Tax Court held that the taxpayers may not disavow the form of
the transaction as reported on the LLC returns. In addition, the court found
that the wife provided marketing advice, signed documents, and entered into
contracts that caused her to be more than merely a passive investor. Lauren
Howell , TC Memo 2012-303 (Tax Ct.).
There are cases where LLC members can have passive income from the LLC, but significant hurdles must be overcome to demonstrate that the income is not subject to self-employment tax. To discuss further please call 781-438-6655.
For additional information on services provided by Thomas W. Bates & Assoc., CPAs, please go to www.twbatescpa.com.
Last Updated by Mike on 2012-11-05 09:38:34 AM