Question

Sub: Advanced Federal Taxation

Sam, Sue and several friends want to form an LLC that will be taxed as a partnership. Sam and Sue are planning on working there and two of their friends, Bill and Barb are planning on helping during the holiday season and work maybe 400 to 800 hours each in November and December.

The other 5 friends will be silent partners who will not work there or participate in management.

If the partnership reports a loss from operations, how do the at risk rules and the passive loss rules impact the chance for each of the partners to deduct the loss?

If the year end tax return results in a profit, Sam, Sue and Bill and Barb want to take guaranteed payments of $25 per hour for all their hours worked and then distribute the remaining partnership income or loss to the partners based on their percent ownership. Discuss the tax consequences of doing that. Is there a self employment tax issue associated with this decision?

Answer 1

Answer:

The "passive loss rules" are the last obstacle for deducting K-1 misfortunes. These principles were enacted in 1986 to close down that period's tax shelters. On the off chance that you have "passive" misfortunes in abundance of "inactive or passive" income, you need to concede the misfortunes until you have passive revenue in a future year, or until you discard the "passive activity" in an taxable exchange.

A misfortune is "passive" on the off chance that you don't "materially participate" in the business. There are various tests that you can use to decide if you physically take an interest, yet the most widely recognized is working at any rate 500 hours in the business in a year.

Land rental is passive by law, except if you are a "qualifying genuine property proficient." Special guidelines keep you from producing "passive" income to permit you to deduct passive misfortunes. For instance, land lease and most speculation income isn't considered "passive" under these standards. The passive misfortune impediment is figured on Form 8582.

In calculating net profit from self - employment, the distributive portion of any thing of income or loss of a constrained partner (other than ensured payments) is avoided. This avoidance was included as a result of the concern that speculators may utilize restricted organizations as a way to get safeguarded for Social Security benefits, subverting the essential rule of the Social Security program that advantages are intended to incompletely repace lost earninngs from work. In this manner, if all LLC individuals are treated as constrained partners, regardless of participation in the business, the entirety of the LLC's income or misfortune would be barred from self - employment tax.