LLC Federal Tax Treatment

Transcription

1 LLC Federal Tax Treatment Single Member / Multi-Member LLC Electing to be Taxed as an S-Corporation SACEA August 20, 2013 Lance Bonlender, EA & Forrest Davis, EA LLC is not defined in federal law An LLC must choose a tax treatment among the federally recognized choices Defaults = disregarded entity Single member = sole proprietorship Multi-member = partnership Form 8832 Elect C-Corporation status Form 2553 S-corporation election 2 What are you really doing? Why would you recommend this? LLC remains as the organizational entity No change to Corporation Commission filing S-corporation treatment is for tax purposes only No need to issue stock certificates Case-by-case basis Projecting a substantial net income Already have someone on payroll 3 4 1

2 Benefits of using the LLC Advantages of S-Corp Treatment? LLC streamlines the process of going to S- Corp tax treatment LLC offers more flexibility Low cost to set up No annual filing requirements Fewer limitations on shareholders Distributions in excess of reasonable compensation Tax treatment of distributions Retirement Plans ½ of self-employment tax is paid by the S-corporation Employee reimbursed accountable plan Per-diem travel, mileage, home office 5 6 Disadvantages of S-Corp Treatment? How do you do this? Worker s Compensation Insurance Unemployment Tax Additional paperwork: payroll tax filing Additional tax return: 1120S Compensation for LLC members who have no employees No longer required to file Form 8832 IRB File Form 2553 with IRS by March 15th of the effective year (calendar year) Late S elections can be justified Form 2553 must include the spouses in community property states 7 8 2

3 Arizona Recognition Cannot convert an LLC to a corporation LLC must be acquired or merged to a corporation and effectively terminated Tax treatment is a federal issue Arizona Corporation Commission has only corporations, not C-corporations or S-corporations What happens when to a multimember LLC that reduces to a Single Member LLC Arizona ACC only requires an amendment IRS Before business starts: write a letter to convert entity to a single member disregarded entity (or Form 8832) After business is in operation: partnership terminates 9 10 Terminating the LLC Your turn Check the Final box on the Form 1120S File Articles of Termination with the ACC LLC stays alive with ACC if Articles of Termination are not filed Requirements to terminate a corporation Articles of Dissolution Tax Clearance Certificate from AzDOR Must be current with annual reports

4 LLC as S-Corporation: Reference Resources S Corporations Businesses-&-Self-Employed/S-Corporations Form 2553 Election by a Small Business Corporation Form 8832 Entity Classification Election T.D (June 20, 2005) Deemed Election To Be an Association Taxable as a Corporation for a Qualified Electing S Corporation S Corporation Stock and Debt Basis Shareholder Loss Limitations Entity Comparison Chart - QuickFinder Arizona Corporation Commission FAQ aq.asp 3. S corp, C corp, 501c3 corp? S corp, C corp, and 501c3 are all Internal Revenue Service (I.R.S.) code references. Those designations pertain only to tax status, and are not actually types of corporations. In Arizona, you would simply form either a forprofit corporation or a nonprofit corporation. The corporation s tax status would later be determined by the I.R.S. and not by the A.C.C. 22. How can I convert my LLC to a corporation? Conversion is not allowed under Arizona law. An LLC can merge with or into a corporation, but cannot simply convert to a corporation. Your notes: oration Lance Bonlender, EA & Forrest Davis, EA SACEA, Aug. 20, 2013

5 Form 8832 instructions (excerpts) Underlines added for emphasis (not in the IRS instructions) Domestic default rule. Unless an election is made on Form 8832, a domestic eligible entity is: 1. A partnership if it has two or more members. 2. Disregarded as an entity separate from its owner if it has a single owner. A change in the number of members of an eligible entity classified as an association (defined below) does not affect the entity s classification. However, an eligible entity classified as a partnership will become a disregarded entity when the entity s membership is reduced to one member and a disregarded entity will be classified as a partnership when the entity has more than one member. Definitions Business entity. A business entity is any entity recognized for federal tax purposes that is not properly classified as a trust under Regulations section or otherwise subject to special treatment under the Code regarding the entity s classification. See Regulations section (a). Association. For purposes of this form, an association is an eligible entity taxable as a corporation by election or, for foreign eligible entities, under the default rules (see Regulations section ). Corporation. For federal tax purposes, a corporation is any of the following: 1. A business entity organized under a federal or state statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation. 2. An association (as determined under Regulations section ). 7. A business entity that is taxable as a corporation under a provision of the Code other than section 7701(a)(3). [S-corporation election] Who Must File File this form for an eligible entity that is one of the following: A domestic entity electing to be classified as an association taxable as a corporation. A domestic entity electing to change its current classification (even if it is currently classified under the default rule).... Do not file this form for an eligible entity that is: Electing to be classified as an S corporation. An eligible entity that timely files Form 2553 to elect classification as an S corporation and meets all other requirements to qualify as an S corporation is deemed to have made an election under Regulations section (c)(v) to be classified as an association taxable as a corporation. These entities are deemed to have made an election to be classified as an association. Effect of Election If an eligible entity classified as a partnership elects to be classified as an association, it is deemed that the partnership contributes all of its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter, the partnership liquidates by distributing the stock of the association to its partners. If an eligible entity that is disregarded as an entity separate from its owner elects to be classified as an association, the owner of the eligible entity is deemed to have contributed all of the assets and liabilities of the entity to the association in exchange for the stock of the association. Note. For information on the federal tax consequences of elective changes in classification, see Regulations section (g). oration Lance Bonlender, EA & Forrest Davis, EA SACEA, Aug. 20, 2013

6 S-corporation vs LLC S-corp SMLLC MMLLC File organization at Corporation Commision Corporation Commision Corporation Commision Tax return to file 1120S Schedule C 1065 Formation document Articles of Incorporation Articles of Organization Articles of Organization Operating document Bylaws Operating Agreement Operating Agreement Owner described as Shareholder Member Member Active owner is employee? Yes No No Compensation - active owner Salary Draw against net profit Guaranteed Payment Subject to FICA withholding Yes No No Subject to FUTA Optional No No Subject to Worker Comp Yes No Optional Subject to SE tax No Yes Yes Health insurance Business expense Pass-through to member Pass-through to member Other fringe benefits Generally business expense Individual Pass-through to member Unreimbursed expenses Employee business expense Business expense UPE if operating agreement allows Home office Employee business expense Business expense Business expense or UPE Self-rental Not allowed Limited Limited Non-compensation distributions Distributions ("Dividends") N/A Distributive share of profit Subject to SE tax No Yes Yes - active member. No - passive member oration Lance Bonlender, EA & Forrest Davis, EA SACEA Aug. 20, 2013