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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16544
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Facts: A single member LLC with a 10% working interest in an

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Facts: A single member LLC with a 10% working interest in an oil and gas lease participates in a new well. The LLC is used to defer liability. this is its only activity. The drilling takes place in September 2013. There is 100K of IDC, 50K in equipment costs paid for in 2013. So, the SMLLC share is 10K and 5K respectively. The well will not produce any revenue until 2014.
Position: The working interest exception does NOT apply and this is a passive activity even though the managing member is the sole member and has the ability to execute contracts. The loss from the IDC and any write off for depreciation will be suspended and utilized against production revenues in 2014 and onward.
Agree?

Megan C :

Hello, how are you doing today?

Customer:

Great. And you?

Megan C :

Good. It's a lovely day.

Megan C :

Since the LLC limits the liability of the owner, the working interest exception does not apply.

Megan C :

Publication 925 page 5 item 2 under the subheading " Activities that are Not passive Activities" states


A working interest in an oil or gas well

which you hold directly or through an entity

that does not limit your liability (such as a

general partner interest in a partnership). It

does not matter whether you materially

participated in the activity for the tax year.

However, if your liability was limited for

part of the year (for example, you conver-

ted your general partner interest to a limi-

ted partner interest during the year) and

you had a net loss from the well for the

year, some of your income and deductions

from the working interest may be treated

as passive activity gross income and pas-

sive activity deductions.
Megan C :

You can see the link, HERE

Customer:

And so it is a passive loss even though the managing member in this smllc is active according to the regs as they can execute contracts etc.

Megan C :

Yes, it would still be passive. The LLC limits liability, and that's the key here.

Customer:

ok. The activity being the well drilling which they did not materially participate in. That's my understanding as well, passive, but every now and then fog rolls in and you want to make sure you don't miss anything. thank you.

Megan C :

You're welcome. It's a complex area, and that's why it took me a minute to even get with you. I wanted to check a couple of sources.

Customer:

Yes it is complex. Liability drives folks to the LLCs but then they lose sight of the working interest exception and then they believe, "Its on a sch C"

Customer:

Just wanted to make sure life had not passed me by.

Customer:

: )

Megan C :

I understand. The key there is limited liability

Megan C :

If there was an exception for SMLLCs then it should be spelled out

Customer:

Thanks again. I approve the payment and will be back.

Megan C :

but, if liability is limited then the activity is passive.

Megan C :

Okay please rate my response using the feature below

Customer:

will do

Megan C :

that's how I receive credit - 5 stars/smileys gives me full credit

Megan C :

Thanks so much!

Megan C and 2 other Finance Specialists are ready to help you
Thanks, TJ for your positive rating. Please come back and visit me any time you have a tax question that needs answered. It was a pleasure working with you today.

In the future you can ask for me directly. Simply put "To Megan C" in the subject of your question. Thanks again for trusting us with your question.