Let's say a California LLC buys a rental property in CA. The property is managed by a management company.
The LLC is owned by 3 non-resident members. None of the members owned more than 49% of the LLC. The LLC is member-managed. The 3 members live in NY, VA and NJ.
I would assume the LLC would file the Federal and CA tax returns. But is the LLC required to file any income OR information return in NY, VA or NJ because decisions regarding the LLC are being made by members living in those states?
Disclaimer: I'm a bit clueless about state issues, but lemme try. Yes, the LLC would have to file federal and California returns. If it is taxed as a C corporation, then federal 1120 and state 100. If taxed an S corporation then federal 1120-S and state 100-S. If taxed as a partnership then federal 1065 and state 568. C and S corporations pay the larger of: (a) 8.84% or 1.5% of profits, or (b) $800, though the $800 minimum tax is waived for the first year of a C or S corporation. For LLC, there is the $800 minimum tax plus the tax/ free based on profits.
The owners of the LLC will have to file CA tax returns to report their CA source income. See the latest bullet point in
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Thisis on form 540-NR. They pay CA tax only on their CA source income,which is probably only the LLC income, though they will be taxed at ahigher rate on this income because of their income from other states-- ie. their federal AGI wil be higher, so CA will tax the 20k theymake at a higher rate than a CA resident who makes just 20k a year. Because the LLC members operate in other states -- that is, they make business decisions while residing in those states -- they will also have to file returns in these other states. However, I'm not aware that other states tax LLC's that are partnerships and S corporations. They will also have to file information returns in all 4 states, which itself carries a fee. In California this is form SI-200C and the fee is $25. You'll need a registered agent in California.
First let me make sure I understand what I think you said -
The property (the rental) is managed by a management company. The LLC is managed by a member. NO member is involved in the management of the rental property. There are my assumptions, if they are incorrect so too will be my answer.
Additionally I do NOT do a lot of work with California returns. The information I'm providing below is generic in nature and should be confirmed. But I do believe it to be correct.
The California LLC will have to file Federal and California tax returns. The default status is to be taxed as a partnership. So the LLC should issue K-1s to the members. These K-1s should information for EACH state of business operations.
The operation of a California business will trigger the source income filing requirement for the LLC members - each member should file a California nonresident income tax return and report and pay tax on the California income.
Many states, and I'd be shocked and surprised if California was different, require the ENTITY to pay a nonresident tax on behalf of nonresident partners/members/stockholders to make sure that the state gets its cut. So the LLC may have had to pay a nonresident tax to California on behalf of the members. This should be reflected on the K-1s for each member so when they prepare their nonresident tax returns they can claim credit for the taxes paid.
It may also be necessary to attach copies of the California K-1s that SHOW the nonresident tax paid for each member so that the member can get credit for those taxes paid.
The next issue that always comes up is - but the operation showed a loss so do I still have to file a nonresident return?
And the answer is . . . I'm not sure that the law requires it but I would prepare one.
Assume that the nonresident activity has losses in the early years. These losses are deductible for Federal tax purposes and may even be deductible for resident state tax purposes. BUT since there is no nonresident income to offset the loss does the loss accumulate and carry forward to be used in the future when the property either has income or is disposed of?
If it does, how do you document those losses for future use without filing a return in the nonresident state?
And, if it does, can the state come back later (say 10 years from now) and disallow the accumulated losses because no return was filed to claim and protect those losses?
Lastly, IF the losses would be usable in the future HAD the returns been filed, but which cannot now be used because the loss returns were not prepared or filed, are you, as the preparer, now liable in some way?
The answers to these questions are state specific and are based on CURRENT law. But we don't what the law may say in the future - hence my tendency to prepare and recommend the filing of those returns.
As the LLC is a CA LLC & owns real property in the state, it obviously has to file Fed & CA. NJ & NY requires flow thru entities such as partnerships (LLC) & Scorps to file with the state if it has resident partners or shareholders. Not sure about VA. You would have to ask your own CPA/tax advisor to look into that.
NJ can be tricky as it has a k1 tax....technically mislabeled as a "fee"
That is basically what I meant except for the following. The LLC would be managed by all 3 members. We could consider appointing one member to do it if there is substantial filing benefits.
With respect to the management of the property, the members would obviously dire/fire the management company. They will also determine what property insurance and from which company to but it from. I don't know whether that is considered as "management" of the property.
Thanks for the info regarding the possibility of the LLC having to pay taxes on behalf of non-resident members.
Would anyone comment on the LLC's filing requirement, if any, in NY/NJ/ VA as a result of decisions being made by members residing in those states? As mentioned in the original post, no member owns a majority interest in the LLC.
Also, what the minimum tax would be; and whether the minimum tax is different if it elects to be taxed as C-Corp, S-Corp or partnership.
I assume the minimum tax is to CA only; and no min. Fed tax ? And there is no CA minimum tax on the LLC if it is taxed as a partnership?
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This> is on form 540-NR. They pay CA tax only on their CA source income,> which is probably only the LLC income, though they will be taxed at a> higher rate on this income because of their income from other states> -- ie. their federal AGI wil be higher, so CA will tax the 20k they> make at a higher rate than a CA resident who makes just 20k a year. >> Because the LLC members operate in other states -- that is, they make> business decisions while residing in those states -- they will also> have to file returns in these other states. By "they will also have to file ...." do you mean the LLC or the members?
If you mean the LLC, does it matter that none of the members own a majority interest in the LLC? If doesn't matter, does it mean that if only one of the non-resident member is appointed to make all day-to- day management decision, then the LLC needs only to file returns in that one state?
[Besides the day-to-day operating decisions, there will be circumstances that require unaimous consent from all members -- e.g. re/financing, sale, new member admission, etc.]
Yes, CA only. No minimum fed tax, and I don't think the other states have a min tax either, though someone mentioned a K-1 tax for NJ. The $800 minimum is there even if it is taxed as a partnership. And it's worse. There's no first-year exemption from the minimum tax in this case. In addition, the net tax is the $800 plus the graduated tax. See page 5 of the instructions for 568.
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If total annual income from The Form 568, Side 1, line 1 is: fee is: equal to or over ? but not over ? $ 250,000 $ 499,999 $1,042
500,000 999,999 3,126
1,000,000 4,999,999 6,251
5,000,000 and over 9,377
So if the LLC makes profit of 260k, the tax is $800 + $1042 = $1842.
With S corps, the minimum tax for the first year is 1.5% of profits, and for every other year is the larger of 1.5% of profits and $800. If your S corp makes millions and millions of dollars in profits, then an LLC will result in less tax. See
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This> > is on form 540-NR. They pay CA tax only on their CA source income,> > which is probably only the LLC income, though they will be taxed at a> > higher rate on this income because of their income from other states> > -- ie. their federal AGI wil be higher, so CA will tax the 20k they> > make at a higher rate than a CA resident who makes just 20k a year. >> > Because the LLC members operate in other states -- that is, they make> > business decisions while residing in those states -- they will also> > have to file returns in these other states.>
The LLC. In addition, I mentioned afterwards that the individual members will have to file CA 540-NR returns. CA will tax the money they make from the LLC, and their own state will, but their own state will give them a credit for the tax paid to CA only on the LLC income.
See the latest bullet point in the Filing Guidelines section:
In addition, an LLC filing Form 568 that has members that are not residents of California must file the agreements of those non-resident members acknowledging that California may tax them and may collect tax from them, agreeing to file a California return and pay tax on the members? share of California source income of the LLC. For any non- residents that do not sign an agreement, the LLC must pay tax on the nonresidents? share of LLC income.
So the LLC only needs an agreement/promise from the members that they will file CA-540-NR returns.
Wouldn't that depend on the state's definition of "conducting business is?"
The OP specifically said that the members of the LLC manage the LLC's business from their homes in NJ, NY and VA. So if their activities in managing the business are sufficient to satisfy the requirement of conducting business in the state, I could see how a reporting requirement could arise.
Presumably if the partners or corporate executives performed their management duties while outside of the home state of the corporation, you could end up with various tax allocation nightmares.
Just an FYI - South Carolina has a similar agreement. IF the nonresident members file an affidavit, the LLC is not required to remit nonresident withholding.
I believe this is correct. I know there is no minimum Fed tax. I know that CA has a minimum fee and I think it is around $800.
The individual members will have to file California Non Resident income tax returns and pay tax to California on their California source income.
I did not mean the LLC.
But it matters not what percentage they own or how little it is. The ONLY exception I can think of that MIGHT apply would be if the distributive share of income from the California rental was below California's filing requirement threshhold - and I admit that I have no idea what that number might be.
There's always a CA minimum tax on LLC's, whether taxed as a partnership or a corporation. In addition, as noted before, there is also a gross receipts tax for LLC's bringing in more than $250,000 in any given year - again, irrespective of how they elect to be taxed.
Start with the individual state's tax departments - you can find these with a Google search. FYI - I have been known to actually call the state department of revenue or taxation and ASK for a senior auditor, then lay out the specifics of the situation and ask for their opinion - of course, all without disclosing the name or ID info of the client.
I seem to recall that NY specifically enacted a telecommuter rule that allowed them to assess income tax on nonresidents who never actually physically went to NY to work BUT who logged onto NY based computers to do their work.
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