LLC Tax Savings

ADVANCED TAX ISSUES FOR LLC’S – Part 2 of 10

Changing The Status Of Entities

Organizations that are eligible and wish to change their classification may do so by filing an election.   Once the classification has changed, the organization must keep that classification for at least five years.

Potential Tax Impact on Changing Classification

A change in tax classification will have tax consequences.

Corporation Status Elected

When a partnership elects to be classified as a corporation, it will be considered to have contributed all of its assets and liabilities to the corporation in exchange for stock in the corporation. 23  The partnership is deemed to liquidate by distributing stock in the corporation to its partners.

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ADVANCED TAX ISSUES FOR LLC’S – Part 1 of 10 Parts

Examination of the Check-the-Box Regulation

Effective January 1, 1997, the IRS issued final regulations that implemented the entity classification system.  These “Check-the-Box” rules allow unincorporated organizations to elect to be treated as either corporations or partnerships for federal income tax purposes.  Certain business entities that are excluded from these rules are corporations organized under state statutes, foreign entities that resemble U.S. corporations, entities taxable as corporations under special Code provisions, and trusts. 1

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CAN MORE THAN ONE BUSINESS MAKE YOUR HOBBY PROFITABLE?

CAN MORE THAN ONE BUSINESS MAKE YOUR HOBBY PROFITABLE?

Internal Revenue Code §183 disallows losses taken regarding any alleged business where there is not a profit motive.  If a transaction is not being engaged in for profit, the Internal Revenue Service will disallow all losses related to such activity.  The service provides various safe harbors, such as showing a profit three out of five years or five out of seven years.  This will establish a presumption that a hobby is not present, but an actual business is.  What happens when you run more than one trade or business that are related and one activity creates a loss while others create a profit.

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Pay No Business Tax

SELL YOUR COMPANY AND PAY NO TAX!

Your business has matured, or your real estate has appreciated, time to cash out and sell.  It has taken a long time, and since you have held your shares or real estate for greater than one year, the gain qualifies for long-term capital gain taxation.  A 15% federal tax rate; not bad!

Yet, 15% of a $10,000,000 gain is $1,500,000.  With a $20,000,000 gain it is $3,000,000.  That is an awful lot of money.

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Tax Shelter

The Last Tax Shelter?

Tax shelters have been a bad word since legislation was designed to eliminate what was considered abusive.  From the sweeping language of the Tax Reform Act of 1986, Pub L. 99-514, tax shelters were, in essence, wiped out and became the equivalent of a 4-letter word in tax planning.

But are tax shelters really gone?

Haven’t there been cases where the IRS has alleged that certain devises are still abusive tax shelters?

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