Single-member LLCs are treated as a sole proprietorship. The IRS does not consider the LLC entity to be separate and distinct from the owner. Essentially, this means that you are personally responsible for all tax payments and returns. When you prepare your personal income tax return, you must now complete a Schedule C schedule. Appendix C presents only income and deductions related to your business activities. If you calculate a profit in Schedule C, the amount is included in the other income you report on Form 1040. The IRS treats single-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a tax return with the IRS. By default, an LLC is treated as a sole proprietorship if there is one owner, and a partnership if there are two or more owners, unless a decision is made to treat the LLC as a corporation for tax purposes. This means that if you are satisfied with the default classification, you do not need to take any action.
If an LLC is treated as a partnership for federal income tax purposes, the business itself is not subject to federal income tax. Instead, each member is taxed on the transferable portion of the LLC`s taxable income. In general, the character of an item of income or loss is the same for a member as for the LLC. Each member of an LLC must account for the member`s distribution share of an LLC`s income and loss as set out in the LLC`s operating agreement, unless the operating agreement does not provide for such allocations or such allocations under the operating agreement do not have a «material economic impact,» in which case that member`s distribution interest in the LLC is determined by reference to the member`s interest in the LLC. LLC. In addition, the income, profits, losses and deductions relating to the property contributed must be shared among the members to account for any difference between the tax base of the property and its market value at the time of the contribution. A member is entitled to deduct his share of the tax losses of an LLC equal to the taxable amount of his LLC interest. Losses in excess of this tax base may be carried forward indefinitely and, subject to various restrictions (e.g. passive activities and risk rules), deducted in any subsequent year in which the tax base is increased above zero in that member`s interest in the LLC. As a general rule, neither the contributing member nor the LLC is recognized for any gain or loss on a member`s asset contribution to the LLC. Similarly, no gain or loss is generally recognized by the LLC or the distributing member in the distribution of property to that member, unless the money distributed exceeds the tax base of that member`s LLC interest immediately prior to distribution. When selling an LLC interest, the selling member recognizes gains or losses based on the difference between the amount realized and the member`s tax base in its interest.
Generally, the initial tax base of a member acquiring an LLC interest from the LLC is equal to the amount of money and the tax base of each property that the member contributes to the LLC in exchange for that interest. The taxable amount so determined shall be increased by that member`s share of the LLC`s liabilities, his share of the LLC`s income and subsequent capital contributions. The member`s tax base is reduced by the member`s share of the distributions and losses of the LLC, as well as a decrease in that member`s share of the LLC`s liabilities (but not below zero). IRC § 752 embodies the legal rules for the sharing of LLC liability. This section provides that any increase in a partner`s share of the liabilities of a partnership or any increase in the individual liability of a partner as a result of assuming the liabilities of a partnership is deemed to be a monetary contribution by that partner to the partnership. Conversely, any reduction in a partner`s share of liabilities or a partner`s individual commitment due to the assumption of those liabilities by a partnership is considered a distribution of money to the partner by the partnership. Unfortunately, the law does not specify how a partner`s share of liabilities is determined. Instead, you have to look at the regulations. Section 752 of the Ordinances treats all liabilities either as a remedy or as a remedy. Partnership liability is recourse liability to the extent that a partner (or a person associated with that partner) bears the economic risk of loss for that liability. A partner`s share of a recourse obligation is the part of that liability for which that partner or a related person bears the economic risk of loss related to that liability.
In principle, a partner is treated as if he were bearing the economic risk of loss linked to a liability of the company, insofar as the partner or related person would be obliged to make a contribution or payment in connection with the liability insurance (and would not be entitled to reimbursement of the contribution or payment by another partner, B. a person, who is related to another partner or to the company) if the company has been liquidated in a disguised manner. In the event of a de facto liquidation, the following events apply: (1) all debts of the Company become due and payable in full; (2) With the exception of assets contributed to secure a liability of the company, all assets of the company (including money) become worthless and have zero value; (3) the partnership disposes of all its assets in the context of a fully taxable transaction without consideration (except the liability exemption where the creditor`s right to repay is limited to one or more assets of the partnership); (4) all items of income, profit, loss and deduction for the year are apportioned among the partners; and (5) fully liquidates the Company. A partnership liability is a recourse liability, to the extent that no partner or related person bears the economic risk of loss for this liability. The Regulations also provide an alternative whereby excess recourse liabilities may be allocated to the partners, in accordance with the manner in which deductions attributable to these recourse obligations can reasonably be expected to be allocated. There is no need to allocate surplus liabilities annually on an individual basis. It is important to realize that a member`s involvement in an LLC is separate and distinct from the member`s capital account. A capital account is essentially a measure of a member`s equity in an LLC. The calculation of the capital account begins with the amount of money and fair value (not the tax base) of other assets contributed by that member to the LLC (less the liabilities secured by such transferred property that the LLC acquires or is subject to in accordance with IRC § 752) and increases the member`s share of the LLC`s income and profits. The Member`s Master Account shall be reduced by the amount of money and fair value of the assets distributed to that Member (again, not the tax base) (less the liabilities secured by such distributed assets that that Member assumes or assumes in accordance with Code § 752) and that Member`s share of such member`s non-deductible losses, deductions and expenses. A member`s capital account does not reflect that member`s share of the LLC`s liabilities unless those liabilities are actually assumed by the member and the creditor is aware of such assumption and can directly enforce the member`s obligation.