Thursday, February 16, 2017

How to report taxes for a single "partner" of an LLC

Single Member Limited Liability Companies

An LLC is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner's tax return (a "disregarded entity"). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

Owner of Single-Member LLC

If a single-member LLC does not elect to be treated as a corporation, the LLC is a "disregarded entity," and the LLC's activities should be reflected on its owner's federal tax return. If the owner is an individual, the activities of the LLC will generally be reflected on:
An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.
If the single-member LLC is owned by a corporation or partnership, the LLC should be reflected on its owner's federal tax return as a division of the corporation or partnership.

Taxpayer Identification Number

For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner's social security number (SSN) or EIN for all information returns and reporting related to income tax. For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.
However, for certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used instead. Therefore, an LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below. Thus, most new single-member LLCs classified as disregarded entities will need to obtain an EIN. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. See Form SS-4 for information on applying for an EIN.
A single-member LLC that is a disregarded entity that does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a single-member LLC, whose taxable income and loss will be reported by the single member owner, nevertheless needs an EIN to open a bank account or if state tax law requires the single-member LLC to have a federal EIN, then the LLC can apply for and obtain an EIN.

Employment Tax and Certain Excise Tax Requirements

In August, 2007, final regulations (T.D. 9356) (PDF) were issued requiring disregarded LLCs to be treated as the taxpayer for certain excise taxes accruing on or after January 1, 2008 and employment taxes accruing on or after January 1, 2009. Single-member disregarded LLCs will continue to be disregarded for other federal tax purposes.
A single-member LLC that is classified as a disregarded entity for income tax purposes is treated as a separate entity for purposes of employment tax and certain excise taxes. For wages paid after January 1, 2009, the single-member LLC is required to use its name and employer identification number (EIN) for reporting and payment of employment taxes. A single-member LLC is also required to use its name and EIN to register for excise tax activities on Form 637; pay and report excise taxes reported on Forms 720, 730, 2290, and 11-C; and claim any refunds, credits and payments on Form 8849. See the employment and excise tax returns for more information.

Joint Ownership of LLC by Spouse in Community Property States

Rev. Proc. 2002-69 addressed the issue of classification for an entity that is solely owned by husband and wife as community property under laws of a state, a foreign country or possession of the United States.
If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:
  • Disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.
  • Partnership for federal tax purposes, the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes.
A change in the reporting position will be treated for federal tax purposes as a conversion of the entity.
A business entity is a qualified entity if
  1. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
  2. No person other than one or both spouses would be considered an owner for federal tax purposes; and
  3. The business entity is not treated as a corporation under IRC §310.7701-2.
Note: If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be "qualified joint ventures" (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses.

Wednesday, February 08, 2017

Non Profits and Charititable organizations BEWARE!

Even though the Internal Revenue Service approves 94 percent of the applications it receives from charities for tax-exempt status filed through the simplified Form 1023-EZ, approximately a quarter of them do not meet the IRS’s own requirements.
IRS building sign
A recent report by the National Taxpayer Advocate pointed out that Treasury Department regulations generally require 501(c)(3) organizations to pass an “organizational test” by including acceptable purpose and dissolution clauses in their organizing documents. However, according to the IRS’s pre-determination reviews of some Form 1023-EZ applicants, 25 percent don’t qualify for tax-exempt status because they don’t meet this test.
A 2015 study by the Taxpayer Advocate Service of a sample of approved Form 1023-EZ applicants in 20 states that make articles of incorporation viewable online at no cost found that 37 percent of them don’t meet the organizational test. A similar study last year by the Taxpayer Advocate Service indicated that 26 percent of the approved organizations didn’t meet the organizational test. In the 2016 study, 4 percent of the approved organizations consisted of two limited liability companies; two churches; seven schools, colleges, or universities or supporting organizations; and one private operating foundation. However, the Taxpayer Advocate noted that such organizations are not eligible to file the Form 1023-EZ.
Laura Kalick, tax director in BDO’s Nonprofit and Education practice, agreed there are some significant documentation shortcomings in the Form 1023-EZ since the narrative description of activities, articles of incorporation and bylines are not required to be submitted.
“In essence they have to meet the purposes test and have a dissolution clause, but they aren’t required to submit those articles and bylaws to the IRS with the form,” she said. “They just have to say, ‘Yes, we are OK and we’re not going to have any private inurement.’ The IRS doesn’t have to see a narrative or the financial information at this point.”
That type of information can be burdensome to provide for a small charity, she acknowledged, and it would be a considerable burden for the IRS to have to check all of that information. To be able to file the streamlined form, a charity can’t have received more than $50,000 in each of the past three years, nor expect that gross receipts will exceed $50,000 per year for the next three years, or have total assets of over $250,000. From July 1, 2014 through June 24, 2016, the IRS received nearly 88,000 of the forms.
The National Taxpayer Advocate recommended the IRS require Form 1023-EZ applicants to submit their organizing documents, unless they are already available online at no cost, along with summary financial information. It said the IRS should make a determination only after it considers the narrative statements along with the additional information. The IRS agreed to revise Form 1023-EZ to require a narrative statement of applicants’ activities, but the Taxpayer Advocate said more information is still needed.
“The Taxpayer Advocate had recommended that the organizations submit their organizing documents and summary financial information and a narrative statement, but to date this has not been something that the IRS has been requiring,” said Kalick. “What the IRS appears to be doing instead is taking a sampling of organizations and looking at those organizations to see if they are in fact in compliance.”
As imperfect as it is, the Form 1023-EZ helps reduce the workload of the overburdened IRS.
“It’s sort of a balancing act,” said Kalick. “It’s easier for them to do the post-submission review and less costly and more effective than for every organization to have to fill in the full-blown Form 1023. They certainly listened to the Taxpayer Advocate, but they have decided this is the better way to go to make it much more streamlined. In fact, to encourage more use of the Form 1023EZ, they reduced the user fee from $400 to $275 as of July 1, 2016.”
The IRS anticipates the reduction of the user fee will contribute to an increase in the adoption rate. Once a charity has been approved for tax-exempt status, it then has to file a Form 990 or the more streamlined 990-N or 990-EZ. The IRS recently added interactive features to the 990-EZ with question marks that provide additional information when filling it out online (see Form 990-EZ for nonprofits updated).
“Both the 990 and the 990-EZ provide so much information that if the organization grows to the size to require the more extensive form, then the IRS and the public are getting more information about the organization,” said Kalick. “That being said, just because you fill out a full-blown Form 1023 and the IRS approves it doesn’t mean that we’re getting all the information. What happens if you fill out the application for exemption and then you do something different than what you said you were going to do on your application? There are just so many exempt organizations out there that it’s impossible to police everything. We’re a nation of voluntary compliance and we have to accept a very high level of faith on everybody’s part.”
The Form 1023-EZ does not include a number of key organizational and operational tests for weighing an organization’s right to claim tax-exempt status. “In essence they ask whether you have the appropriate provisions in your articles of incorporation, but because you’re not actually submitting those articles of incorporation and bylaws then they can’t do a cross-check,” said Kalick. “A 501(c)(3) has to be organized for charitable, educational, scientific or religious purposes, and have no private inurement, no substantial lobbying, and no political activity. The assets have to be dedicated in perpetuity to charitable purposes, so in essence you have to say that upon dissolution the residual assets will go to another 501(c)(3) organization.”
Kalick agrees with the National Taxpayer Advocate’s recommendations about providing more information. “The Taxpayer Advocate report said it would really not be very difficult to have the articles of incorporation provided as part of the application and also that there should be some narrative and some basic financial information,” said Kalick. “I think that makes sense. Filling out the full-blown form is really difficult, but I really like the idea of putting in a narrative because a good number of organizations just have very broad general charitable purposes. They will say the organization is organized exclusively for charitable and educational purposes, and then they have the dissolution clause, but the narrative really tells what the organization is going to do. What one person thinks is charitable might not be charitable in the eyes of the IRS.”

Monday, February 06, 2017

Early Withdrawals from Retirement can be costly.

Early Withdrawals from Retirement Plans
Many people find it necessary to take out money early from their IRA or retirement plan. Doing so, however, can trigger an additional tax on top of income tax taxpayers may have to pay. Here are a few key points to know about taking an early distribution:
  1. Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
  2. Additional Tax. If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they may have to pay an additional 10 percent tax.
  3. Nontaxable Withdrawals. The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.
  4. Check Exceptions. There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
  5. File Form 5329. If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return. Form 5329 has more details.
  6. Use IRS e-file. Early withdrawal rules can be complex. IRS e-file is the easiest and most accurate way to file a tax return. The tax software that taxpayers use to e-file will pick the right tax forms, do the math and help get the tax benefits they are due. Seven out of 10 taxpayers qualify to use IRS Free File tax software. Free File is only available through the IRS website at
More information on this topic is available on
Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.