Assigning losses in an LLC

I am looking to find out if something is legal from a tax perspective because I heard of a company doing something along these lines a few years ago but wasn't privy to the details. Basically if there are two owners to a LLC can one owner accept all the loses to the LLC while the other owner accepts none? Steve

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Reply to
scruffy323
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"scruffy323" wrote

Yes, it's possible, but there needs to be an economic purpose for doing so, and not just one of tax avoidance. You would still have the issue of basis in which to deduct the loss, and passive activity rules to clear for that partner.

-- Paul A. Thomas, CPA Athens, Georgia

Reply to
Paul Thomas, CPA

The basic rule is that if profits and losses are to be distributed other than in proportion to ownership, there must be a good, valid economic reason to do that - other than tax reasons. So the answer to your question is no, not unless you have a damned good financially viable but non-tax reason for it. Stu

Reply to
Stuart Bronstein

The answer to your question is ... maybe. In order to do this, the special allocation of losses has to have what the regulations call "substantial economic effect". In other words, there has to be a reason for doing it aside from it being beneficial from a tax perspective. Special allocations like this also generally require a whole bunch of additional language in the operating agreement saying that the members of the LLC will even everything out from a tax perspective if the LLC dissolves. This is not a do-it-yourself project, the regulations are long and arcane...I'd highly recommend seeking out a tax lawyer who is familiar with partnership tax.

--Chris

Reply to
cballard

"scruffy323" wrote

It is often done, but the answer is "It depends on the facts and circumstances" which had better clearly have economic substance.

Keep in mind an LLC is simply a partnership with limited liability amongst the partners.

Back in the days of iron men and wooden ships, CPA firms were partnerships which means there had to be two partners. The example I used in classes was Smith & Wesson, CPA had two partners Smith and Wesson. Wesson retires and Smith had two years to find another partner or change the name. So Smith offers Jones, a CPA employee, an interest in the partnership whereby Jones gets 2% of the profits and 0% of the losses.

Dick

Reply to
Dick Adams

Since losses are "asigned" based on membership, that works if one owner has 99% ownership, thus the other minority member would be "awarded" 1% of the loss. Remember though, deductibility on a member's 1040 still depends on basis within the LLC. ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

A well drafted partnership agreement can address these issues. It certainly possible, at least theoretically. However, if there is no economic substance, or only tax motivation, the IRS can disregard your allocations. So, as a practical matter, it can be quite difficult to accomplish. ___________________________________

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Reply to
Benjamin Yazersky CPA

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