Forming LLC to avoid self-employment taxes.

Haskel LaPort · 2008-04-23T01:44:30+00:00

I was requested by a taxpayer to look at a 1065 prepared by his accountant. The taxpayer purchased a business in 2007 using funds provided by a mortgage on his personal residence. Because the property is half owned by his wife, she insisted on having a ½ interest in the new business. The attorney formed an LLC naming both the husband and wife as equal partners and that both assets and income were to be divided 50/50. The wife is not involved with the running of the business.The accountant divided the 2007 $60,000 profit evenly on the 1065 but reported only the husband's half as self-employment income and the wife's as passive income and not self-employment income. Is there any justification for how the accountant handled this situation?If none, then how should this taxpayer been advised starting with the formation of the LLC with the wife as an equal partner?

Apr 23, 2008 22 Replies

Rate this thread:

Stuart Bronstein 18 years ago

No, tinyurl is not associated with the NY Times - it's an independent website that allows you to take long url's and shorten them. That particular one is to the IRS website:

formatting link

Stu

Vote

rick++ 18 years ago

This is similar to the debate facing hedge fund managers. They claim because the underlying business is investing, their percentage of the gains (typical 20%) is really investment income ratehr than earned income and should be taxedas such. That lowers taxes by half.

Vote

Seth 18 years ago

That's not the general case, and it doesn't lower taxes by anywhere near that much (it's short-term gains, taxed like earned income except for Medicare).

It's actually the investment fund managers (venture capital) who try that trick, claiming their cut is long-term capital gains.

Seth

Vote

Join the Discussion

Have something to add? Share your thoughts — no account required.

Didn't find your answer?

Ask the community — no account required