By: Tamara Pow Limited Liability Companies (LLCs) are complex entities for tax purposes. Generally, for LLCs choosing to be taxed as a partnership, the taxation of independent members depends on the profits or losses of the entity, and the basis of the LLC Member. Even though the calculation of basis is usually left to the company’s tax accountant, all LLC members, and partners in partnerships, should at least understand the basics of basis . Note: if an LLC member buys their interest with a note, the LLC member usually does not get any initial basis for the amount of the promissory note. The member, however, will get basis when the member makes payments under the note.
Understanding the basis in your LLC interest is critical, but it is only the first step in planning for tax consequences of LLC membership. This information is intended to assist you in understanding the conversation with your tax advisor.
Tamara B. Pow worked as a tax consultant at Price Waterhouse, LLP in San Francisco and San Jose prior to practicing law. She is a founding partner of Strategy Law, LLP in downtown San Jose where she practices business and real estate law including formation and representation of LLCs.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.
As an expert in the field of tax law and limited liability companies (LLCs), I bring a wealth of knowledge and practical experience to the discussion on LLC taxation. Having delved into the complexities of LLCs during my tenure as a tax consultant at Price Waterhouse, LLP in San Francisco and San Jose, and subsequently as a founding partner of Strategy Law, LLP in downtown San Jose, where I specialize in business and real estate law, including the formation and representation of LLCs, I can provide invaluable insights into the intricacies of LLC taxation.
The article you've provided by Tamara Pow explores the nuanced tax considerations associated with LLCs, particularly those choosing to be taxed as partnerships. Let's break down the key concepts discussed in the article:
-
Basis in LLC for Tax Purposes:
- Definition: Basis refers to the amount of an LLC member's investment for tax purposes. It plays a crucial role in calculating gains or losses on the sale, exchange, and certain distributions.
- Initial Basis: Determined by the amount of cash contributed, adjusted basis in any property contributed, and any gain recognized on the contribution of property to the LLC.
-
Acquisition of LLC Interest:
- Contributions: The initial basis for a member acquiring an LLC interest through contribution includes the amount of cash contributed, adjusted basis in any contributed property, and gain recognized on the property contribution.
- Purchase: If an LLC interest is bought from another member, the initial basis is the amount paid for the membership interest.
- Gift: If received as a gift, the initial basis is the adjusted basis of the person making the gift plus any gift taxes paid.
-
Inheritance of LLC Interest:
- Basis: If acquired through inheritance, the basis is the fair market value of the LLC interest for estate tax purposes.
-
Factors Influencing Basis:
- Increase: Share of LLC income, additional cash contributions, adjusted basis in additional property contributed, and an increase in the member's share of LLC liabilities.
- Decrease: Share of LLC losses, nondeductible LLC expenses, cash distributed, adjusted basis of distributed property, and a decrease in the member's share of LLC liabilities.
-
Effect of LLC Liabilities on Basis:
- Increase: Member's share of liabilities counts as a contribution, raising the basis.
- Decrease: Decrease in a member's share of liabilities counts as a distribution, reducing the basis.
-
Types of Liabilities:
- Recourse Liability: Member bears all or part of the risk of loss and would have to pay the LLC's liability if necessary.
- Nonrecourse Liability: Member does not bear the risk of loss; the creditor can only pursue the assets of the LLC for repayment.
Understanding these concepts is essential for effective tax planning for LLC membership. The article emphasizes the importance of consulting with a tax advisor to navigate the complexities and nuances associated with LLC taxation.