Question

Ashlee, Hiroki, Kate, and Albee LLC each own a 25 percent interest in Tally Industries LLC, which generates annual gross receipts of over $10 million. Ashlee, Hiroki, and Kate manage the business, but Albee LLC is a nonmanaging member. Although Tally Industries has historically been profitable, for the last three years losses have been allocated to the members. Given these facts, the members want to know whether Tally Industries can use the cash method of accounting. Why or why not?

Answer 1

Partnerships without corporate partners may use the cash method of accounting.

However, partnerships that are tax shelters may not use the cash method of accounting.

Partnerships considered as Tax shelters are ineligible to use the cash method.

Syndicates among the other categories of “tax shelters”.

Syndicate is any partnership that allocates more than 35 percent of its losses to either limited partners or “limited entrepreneurs”.

In addition to limited partnerships, this provision likely also applies to LLCs because law defines a limited entrepreneur as any person, including LLC members, other than a limited partner, who does not actively participate in the management of the enterprise.

In nutshell , if more than 35 percent of losses in a given year are allocated to either limited partners or to LLC members not actively participating in the management of an LLC, the limited partnership or LLC will be not be permitted to use the cash method.

So, Because of these restrictions, a large number of limited partnerships and LLCs that would otherwise qualify are denied the use of the cash method.

In the given case, only 25 percent of Tally Industries’ loss for the year allocated to a member that does not actively participate in management and it does not have a corporate member, Tally will be able to use the cash method.

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