Pass Through Scenario - Please share thoughts

[BulldogTom]

If an S Corp is an LLC Member of a company taxed as an S Corp, how will the passthrough be handled under the new law?

Here is the scenario.   S Corp wholly owned by H&W (not professional Services) is a 60% owner of a LLC (taxed as S Corp as well) that provides professional services.   The S Corp receives K-1 from LLC for 60K income.   S Corp gives H&W K-1 with 100K income (40K from S Corp and 60K from LLC).  H takes salary from both companies (so lets assume there is no limitations on the passthrough deduction at this point).

Does the S Corp get the Passthrough Deduction on the income from the LLC?  Or does the S Corp pass in full the 60K to the S Corp owner, who then applies the passthrough deduction at the H&W 1040?

Is it possible that the S Corp can take a passthrough deduction for the income coming from the LLC, and then turn around and issue a K-1 to H&W that they then apply another passthrough deduction on their own 1040?   That would be a huge loophole.   

This is a real scenario by the way.  Not my client, yet, but could be in the future.

Thanks

Tom
Modesto, CA

 

[Roberts]

I'm guessing the iRS will have to rule on this but I doubt a business return will be allowed to take a deduction.

[Roberts]

Just wondering, for all the excitement about the cuts and whatever else, how come nobody ever mentions the major tax avoidance of the S-corp and possibly doing away with it? It's so blatant for a lot of business owners.

[Lee B]

The pass through deduction is a Form 1040 deduction reducing taxable income.

[BulldogTom]

2 hours ago, cbslee said:

The pass through deduction is a Form 1040 deduction reducing taxable income.

Ah, that makes sense.   Where did you find that?

Thanks

Tom
Modesto, CA

[Lee B]

Tom,

Click on the link, Judy posted on the 4th post of the other thread and start reading.

[BulldogTom]

I don't click links.   I know it is probably safe on this site, but I just get the heebie jebbies when I see an underlined blue link with random characters.   I just think there is some scammer in a far away country waiting to jump through the interweb thingy and ruin my life.

But thanks for clearing up my question.

Tom
Modesto, CA

[JohnH]

A cursory look at the rules tells me that a small business operating as a C corp would generally be much better off electing S corp status. A C corp earning less than $75K or so will see an increase in its tax liability since the 15% rate on the first $50K is now raised to 21%.

[Edsel]

Going back to the original post, I have to wonder if the one LLC filing as an S corp can be a legitimate shareholder in another S Corp.  On the face of it, it cannot.  However, I don't know if being an LLC changes anything.  I thought if it chooses to file as an SCorp it has to take on all the characteristics of an S Corp, and that would include legitimacy.

[jklcpa]

3 hours ago, Edsel said:

Going back to the original post, I have to wonder if the one LLC filing as an S corp can be a legitimate shareholder in another S Corp.  On the face of it, it cannot.  However, I don't know if being an LLC changes anything.  I thought if it chooses to file as an SCorp it has to take on all the characteristics of an S Corp, and that would include legitimacy.

The very limited circumstance when an LLC may be a shareholder in an S corp is when the LLC is a single-member LLC because it is a disregarded entity.  The entity tax reporting of husband-wife LLCs is dependent on the state it is in. In non-community property states, these are taxed as partnerships, and in community property states they are considered disregarded entities.

Perhaps Bulldog Tom will confirm if this is the rule that is allowing his client to have one S corp that owns an LLC that is a shareholder of another S corp. 

[BulldogTom]

On 12/24/2017 at 12:31 AM, jklcpa said:

Perhaps Bulldog Tom will confirm if this is the rule that is allowing his client to have one S corp that owns an LLC that is a shareholder of another S corp. 

I made a mistake.  The S-Corp is a member of an LLC taxed as a partnership.

Tom
Modesto, CA