To: John & Jane Smith From: Andrea R. Martinez Date: 11/28/2013 Re: Tax Issues
Per my conversation with Mr. and Mrs. Smith regarding their specific tax issues, I have done some research on each matter. The recommendations that follow will be beneficial in helping to reduce their tax liabilities.
1. John Smith tax issues:
a) How is the $300,000 treated for purposes of Federal tax income?
Gross income, as defined in IRC 26 § 61, is “all income from whatever source derived, including (but not limited to) the following items: (1) compensation for services, including fees, commissions, fringe benefits, and similar items.” (IRC 26 § 61(a)(1)). With this understanding, the $300,000 is considered fees and must be treated as gross income, and is subject to Federal income taxes. Based on the verbiage from the IRS, “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.” (IRS.gov).
John will be expected to report the full $300,000 of earned income on Schedule C of his individual tax return, or can be claimed as gross income on the LLC return. Based on the variance in state laws, a single person LLC can report income on the business return or individual. An LLC is considered transparent in states that do not allow separate reporting. This means that the income cannot be reported apart from the individual. By filing Form 8832, John will be able to choose a tax status for the entity besides the default of individual. In some cases, changing the tax status will save a company thousands in taxes each year.
