LLC Reporting

[Edsel]

Some people should never create an LLC.

My client has just created one at the urging of lawyers (of course).  Electing to report as a proprietorship will subject the taxpayer to SE tax, but:

The only activity within the LLC is the existence of Receivables on Installment sales.  Income is:  (i) Interest on Loans and (ii) Installment Sale Capital Gains.  Neither of these activities without other circumstances are subject to SE tax.

Reporting as a proprietorship, Sch C, is not tailored to report this kind of income, but is tailored to create SE tax.

Can the LLC be reported in some manner other than a Sch C?  (Assume the LLC is defaulted to report as a proprietorship).

 

[mircpa]

If all it is reporting is interest income & capital gains I don't know why anybody would suggest to float an LLC. I would continue to report as I normally would report on Sch B & D & would report $ 1 income on Sch C LLC (just to be complying with filing requirements for LLC)

[Abby Normal]

LLCs do not default to Sch C. I have plenty on Sch E. They are simply disregarded for tax purposes.

[ILLMAS]

2 hours ago, Edsel said:

Some people should never create an LLC.

My client has just created one at the urging of lawyers (of course).  Electing to report as a proprietorship will subject the taxpayer to SE tax, but:

The only activity within the LLC is the existence of Receivables on Installment sales.  Income is:  (i) Interest on Loans and (ii) Installment Sale Capital Gains.  Neither of these activities without other circumstances are subject to SE tax.

Reporting as a proprietorship, Sch C, is not tailored to report this kind of income, but is tailored to create SE tax.

Can the LLC be reported in some manner other than a Sch C?  (Assume the LLC is defaulted to report as a proprietorship).

 

Put it on the client to find a solution via the attorneys.

[jklcpa]

3 hours ago, Edsel said:

The only activity within the LLC is the existence of Receivables on Installment sales.  Income is:  (i) Interest on Loans and (ii) Installment Sale Capital Gains.  Neither of these activities without other circumstances are subject to SE tax.

Whether or not the income is subject to SE tax depends on if this is considered trade or business income in the regular course of this entities business.

What type of business is this?

[Possi]

2 hours ago, Abby Normal said:

LLCs do not default to Sch C. I have plenty on Sch E. They are simply disregarded for tax purposes.

I learn something new every day. Every. Day. 

[Edsel]

3 hours ago, jklcpa said:

Whether or not the income is subject to SE tax depends on if this is considered trade or business income in the regular course of this entities business.

What type of business is this?

I think you've put your finger on what I consider to be a threat.

There are a dozen or so receivables set up when land was sold on installments.  My fear is that this would be considered an operating business instead of investments resulting in interest and capital gains.  This could be recharacterized as a Sch C business, and not only subject it to SE tax, but also loss of capital gain treatment.

[Terry D EA]

On ‎7‎/‎11‎/‎2018 at 11:38 AM, mircpa said:

If all it is reporting is interest income & capital gains I don't know why anybody would suggest to float an LLC. I would continue to report as I normally would report on Sch B & D & would report $ 1 income on Sch C LLC (just to be complying with filing requirements for LLC)

I agree. A single member LLC can be considered a disregarded entity thus the Sch C. However, I don't understand the rationale either. Also, wondering about Judy's response as well. What is the nature of this business?

[BHoffman]

The nature of the income determines the tax treatment.  Whether the client is in an ordinary business or is an investor should have been determined when he first began reporting.  Limited Liability Companies are just legal entities.  LLC does not automatically equate to the tax requirement of a Sch C.  I have lots of rentals reported by LLCs on Sch E.  

[mwrightea]

I'm with Bhoffman and Abby Normal on this issue.

[Edsel]

There seems to be a consensus that an LLC does not necessarily invoke a Sch C, and I can understand that the design of a Sch E can easily accommodate reporting.

However, the logistics of the current situation fall into confusion, as neither Sch C nor Sch E accommodate an LLC with no other income than installment sales (capital gains) and interest on loans.  It is easy to apply the consensus and say that the reporting can be done on Form 6252, Sch D, and Sch B.  I would love to do this and be done with it.

However the LLC has a Federal ID #, and the gubbermint is expecting some kind of tax return to be identified.  Reporting on Sch B and 6252 does not identify the LLC as anything.

Judy was headed to a perilous revelation:  namely that an LLC should be some sort of business, and if the IRS were to wrap its arm around the situation, they could determine that the practice of making loans is an operational pursuit and not an investment.  If this happens, [poof!!] there goes preferential capital gain treatment down the toilet, and all such income becomes SE taxable.

For the record, there is no question that these loans are an investment, because both spouses are employed full-time, and the portfolio of loans has been slowly building over several years.

[Bart]

I would think disregarded means disregarded.  It does not exist.  No such thing as a llc.  it is just the taxpayers and is reported as if it were owned by the taxpayer.

[Jack from Ohio]

LLC is disregarded by the IRS.  If you have an LLC, the defaults are Sole Proprietor, if a single owner (This fits the situation being discussed), and a partnership, if more than one owner.  These defaults are exactly the same as if NO LLC EXISTED.

This is being WAY OVERTHOUGHT.  IRS does not care, at all, about an LLC.  

The person, in this scenario, will file as a sole proprietor.  He can use the EIN, if he chooses, but is not required to.  The EIN was assigned to the taxpayer, not the LLC.

Way too much overthinking on this one.

[Edsel]

Hi Jack - good to hear from you.

I understand most of the posts, but none of them have pointed me to the logistic answer:  "How do I file?"

1. "The person, in this scenario, will file as a sole proprietor."  That implies Sch C and self-employment tax.
2. The LLC does not exist, thus allow the individual to use 6252, Sch B, and Sch D.  Nowhere to enter the LLC or federal ID#.  Since the LLC was assigned a Federal ID#, will not the IRS be expecting some sort of return?

 

[Gail in Virginia]

An LLC is created at the state level.  The only thing the IRS has is the application for an EIN.  In my opinion, the fact that someone applied for an EIN and never filed a tax return is not that unusual,.  They might have planned to start a business and changed their minds.  They may have filled out the EIN application that it was only for banking purposes.  I would not say the LLC does not exist, but as a disregarded entity it might not be required to file a tax return. I would report capital gains from installment sales on the 6252, interest on the Schedule B, and get with it.

[Catherine]

I like Gail's answer, but will only add to watch for required state filings (LLC annual report, for example, is due in MA).  

[Jack from Ohio]

7 hours ago, Edsel said:

Hi Jack - good to hear from you.

I understand most of the posts, but none of them have pointed me to the logistic answer:  "How do I file?"

1. "The person, in this scenario, will file as a sole proprietor."  That implies Sch C and self-employment tax.
2. The LLC does not exist, thus allow the individual to use 6252, Sch B, and Sch D.  Nowhere to enter the LLC or federal ID#.  Since the LLC was assigned a Federal ID#, will not the IRS be expecting some sort of return?

 

1. The nature of the business determines which forms need to be filed.  The IRS  does not care about the LLC.  Pretend the LLC never existed, and file the tax return appropriately, based on the facts and circumstances of the business.

If you file Schedule C, you can use the LLC EIN.  It makes NO DIFFERENCE to tax liability, or how to file the return.

Take the LLC out of your thinking, create the return, and file appropriately.

Again, this is being way way overthought.

[Roberts]

If it's only dividends, interest and capital gains running through the LLC, why do you feel they are subject to SE tax?

[Edsel]

Thanks to all - I will cease on the subject.  Roberts, they should not be subject to SE tax - this is the very thing I seek to avoid.

[michaelmars]

Bart and Gail have it right, its a disregarded entity and you file as if there wasn't an entity thus sch D and B.