Don’t Miss the Boat!

Magnifying Glass and Tax

By:  Amanda Wilson

Undoubtedly, right before the end of the year, you were inundated with information about steps you could take as part of the year-end tax planning for your business. While the end of the year does offer great tax planning opportunities, there is another important time that often goes unnoticed – April 15th.  If your business uses a tax partnership (which can be in the form of a general partnership, limited partnership, or limited liability company), take action now.  You do not want to miss the boat on this significant tax planning opportunity.

The partnership tax rules allow partners to amend their partnership agreement retroactively to January 1 of the prior year if the amendment is in place before the tax return (without extensions) for that year is due. More simply, an amendment made before April 15, 2015 can be made effective for the 2014 tax year. For this reason, now is the time to review how your partnership will be allocating taxable income and losses to its partners for the 2014 tax year.  Often times, the allocations may give you unexpected or unfavorable results.  Is one partner allocated losses that he cannot use?  Is another partner getting a huge allocation of taxable income unexpectedly?

If the answer is yes, consider making changes.   Some simple tax planning could minimize or avoid these tax results.  But you have to act now.  Unfortunately, once the original due date for filing the partnership return has passed, this planning opportunity is lost, even if your partnership received an extension for filing its return.

Don’t Break the Bank

BankingBy: Amanda Wilson

Because of the significant flexibility and tax benefits associated with partnerships, many businesses utilize partnerships in some shape or form. For tax purposes, a partnership can be in the form of a general partnership, limited partnership, limited liability company or limited liability limited partnership. While these forms offer great tax advantages, they can also result in unexpected surprises and traps for the unwary when a partnership interest is sold.

In a recent article, I explain many of these traps, and how you can avoid breaking the bank with an unexpected and unpleasant tax day surprise.  The article can be found here.

Can or Should an LLC be a Shareholder of an S Corporation?

By: Amanda Wilson

Many private companies utilize S corporations in their ownership structure, as they provide beneficial tax treatment. In order to qualify as an S corporation, the corporation can have only certain types of shareholders. Specifically, a partnership cannot be a shareholder. Yesterday, someone asked me whether a single member LLC could be a shareholder. The answer should be yes, as the LLC is treated as though it does not exist for tax purposes. Private guidance indicates that the IRS agrees with this answer.

The bigger question, though, is whether an LLC should be a shareholder of an S corporation. My answer to that is generally no. Initially, the LLC only has one owner, so it does not exist for tax purposes. The problem is that, as time passes, memories fade and the owner of the LLC may forget that he must be the only owner. He may transfer some of his LLC interest to his spouse, or make a gift to one of his kids. Suddenly, the LLC springs into existence as a partnership for tax purposes. The result? The corporation loses its status as an S corporation for at least 5 years. All the careful tax planning and structuring has been undone.

For this reason, using a single member LLC to own stock in an S corporation, while probably permissible, is not usually a good idea. The normal benefit of using a single member LLC, which is to shield the owner from liabilities associated with the assets held by that LLC, is not necessary. The S corporation itself provides that liability protection. More simply, using an LLC introduces significant tax risk, and provides no real benefit.


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