Sole Proprietor or 1065??

Technical topics regarding tax preparation.
#1
Al723  
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LLC A has 3 Members (LLC B, LLC C, LLC D).
LLC C and LLC D sold there interest to LLC B and as of December 31, 2018 1 LLC remains, LLC B.
LLC B is a conduit which is owned by 4 individuals.

Is LLC A considered a disregarded entity?
If so, would it be wise to dissolve LLC B and have the 4 individuals own interest directly to LLC A?
 

#2
Chay  
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For the first question, the answer is yes, and the former partnership must file a short year return ending on the date that 50% or more of its ownership interest was transferred.

The second question is a legal question that you should direct the members of LLC B to consider for themselves.
 

#3
Al723  
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I thought the whole technical termination was changed with the new TCJA and no more short year returns.

If LLC A is considered a disregarded entity, do we report all income and expense on LLC B going forward? What about the assets that were on LLC A and depreciation?

Do we ignore LLC A and just execute all transactions on LLC B's income statement and then file a 1065 to issue K-1's to the 4 members holding interest in LLC B.

This seems like more work for nothing. From a tax point of view, it seems wise to execute a sale/purchase and get ride of the middle partnership and have the members own direct interest in LLC A.
 

#4
Nilodop  
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TCJA eliminated technical, not actual, terminations. Getting rid of all but one partner would usually be an actual termination. See 708(a). However, if I have your facts right, I assume the 4 individuals who own LLC B have been filing as a partnership (i.e., have not elected out under 761(a)), so there was not a termination and LLC A is now a partnership of individuals 1, 2, 3, and 4. The business of the former BCD partnership is still being carried on by B (who is individual 1), 2, 3, and 4. I think ...
 

#5
Chay  
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Sorry for clouding the issue with my ignorance of the new law. Ignore the "50% or more" part of my original post.

I still believe that LLC A is not a partnership, as Nilodop suggests, but rather a disregarded entity. All of LLC A's income, credits and deductions would be reported directly on LLC B's tax return as though LLC A did not exist.

I do not think this treatment gives rise to "more work for nothing". It seems like it would be the same amount of work for nothing. From a tax perspective, there is no difference between dissolving LLC A and reporting via LLC B or not dissolving LLC A and reporting via LLC B. That's why I suggested this issue is a legal question.
 

#6
Nilodop  
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There is no doubt that the second question is a legal question. As to the tax question, though, how do you get around section 708
(b) Termination
(1) General rule
For purposes of subsection (a), a partnership shall be considered as terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.
? Let's apply that.

The original (now former) structure was (I gather) that they filed B, C, and D as the BCD partnership, with the operations of LLC A being included in the BCD 1065, and individuals 1, 2, 3, and 4 filed as the 1234 partnership. Then, after the buyout of C and D by B, what they had was that A is a disregarded entity, but it is now owned by LLC B, which includes A's operations in the 1234 1065. Seems to me that the operations of A are still being carried on by one of its former partners, LLC B.
 

#7
Al723  
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Nilodop wrote:TCJA eliminated technical, not actual, terminations. Getting rid of all but one partner would usually be an actual termination. See 708(a). However, if I have your facts right, I assume the 4 individuals who own LLC B have been filing as a partnership (i.e., have not elected out under 761(a)), so there was not a termination and LLC A is now a partnership of individuals 1, 2, 3, and 4. The business of the former BCD partnership is still being carried on by B (who is individual 1), 2, 3, and 4. I think ...



Yes, B is simply a conduit between the 4 individuals and LLC A, although now it is the controlling entity since it bought out C & D.

I spoke with a colleague of mine and we are worried about the bank and loans that are in LLC A's company name.
We decided to continue to file financial statements for LLC A as this is required by the bank on a quarterly basis and at the end of the year we report LLC A's income and expense on LLC B's financial statement and file a 1065 for LLC B.

I thought it would be simpler to just report the net income on LLC B's P&L and label it as income from LLC A so bankers can see the relation between both entities. Another CPA told me that he would attach the 851 Schedule to show that all entities are being reported even if it's a corp form. (He's done this in the past)

What about all the assets and liabilities on LLC A? Since technically everything is under LLC A's entity name along with the loan should I leave it separated or does this also have to be reported under LLC B form 1065.

I had an asset account under LLC B to show the investments made to LLC A by the 4 members of LLC B. Merging the BS items would be a bit confusing unless I remove this asset investment account and replace it with the Assets and Liabilities of LLC A.. Should be the same thing...

You guys are a big help.

Thank you very much, love this site!
 

#8
Nilodop  
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LLC B is a conduit which is owned by 4 individuals.


Yes, B is simply a conduit between the 4 individuals and LLC A, although now it is the controlling entity since it bought out C & D.

By "conduit", do you mean partnership? Is it not a MMLLC, the default treatment of which is "partnership"?

Another CPA told me that he would attach the 851 Schedule to show that all entities are being reported even if it's a corp form. (He's done this in the past). Never heard of doing that. The form may have the info you are trying to give but it only relates to consolidated returns of corporations.

We decided to continue to file financial statements for LLC A as this is required by the bank on a quarterly basis and at the end of the year we report LLC A's income and expense on LLC B's financial statement and file a 1065 for LLC B.
. That's fine.
 

#9
Al723  
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[quote="Nilodop"] LLC B is a conduit which is owned by 4 individuals.


Yes, B is simply a conduit between the 4 individuals and LLC A, although now it is the controlling entity since it bought out C & D.

By "conduit", do you mean partnership? Is it not a MMLLC, the default treatment of which is "partnership"?

Yes, it is a MMLLC.

What are your thoughts on the loan basis of the disregarded entity?
After completing the 2018 tax return I marked LLC A's return final since this will be its last year filing a 1065 along with the final box checked for all K-1's.

The K-1 that was issued to LLC B had the loan basis amount, QBI information along with the income and capital accounts. This was okay but next year when filing all activity on LLC B, there is no loan on the books. This will remain under LLC A's financials.

How will this affect the basis of the members of LLC B when filing the tax return? My concern is that LLC A will refinance and distribute the excess cash to LLC B and then to the members. Loan basis usually covers this distribution from being taxed.

What are your thoughts?

Thank you.
 

#10
Nilodop  
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Everything (assets, liabilities, equity, income, expenses) on A's statements now goes on B's. That's what happens when an entity is disregarded.
 

#11
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Does the concept "disregarded entity" have **anything at all** to do with an entity's existence for legal, real-world, liability, protection from liability, title and ownership of assets, etc., etc., or is it **only** of any consequence in the entity's **tax** world? Have we mingled the two worlds - "real" and "tax" - and are we now trying to dig ourselves out of the morass that that mingling left us in? [...the morass in which that mingling left us?"] Keep the assets separate, keep the accounting separate, don't remove liabilities from the legal entity that owes them. If you do the accounting "for taxes only" you may find that people who didn't expect to be liable for things might be found to be liable for them when a creditor sues... And IANAL.
 

#12
Chay  
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Harry has a good point. Schedule L of Form 1065 is the "Balance Sheet per Books". It's asking for what LLC B actually has on its balance sheet in the real world, which would probably consist almost entirely of its ownership interest in LLC A. While LLC A's income and expenses would certainly need to be reported in detail on Form 1065, wouldn't we leave the details of its assets and liabilities off of LLC B's balance sheet?
 

#13
Nilodop  
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While LLC A's income and expenses would certainly need to be reported in detail on Form 1065, wouldn't we leave the details of its assets and liabilities off of LLC B's balance sheet?. Then you would not be disregarding it.
 


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