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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
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Experience:  US Taxation specialist.
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Hi, my medical practice, PLLC is owned by 2 medical PAs- myself

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Hi, my medical practice, PLLC is owned by 2 medical PA's- myself and my partner. Last year we had to let one employee go in a middle his contract and paid a sum of money reflecting how much he would have made is he stayed till the end of his contract. It was messy and unpleasant situation and in the midst of it we did not think it through. We cut 2 bank checks, the money came from our personal accounts since we did not have enough cash in PLLC( it's a start up), checks were deposited to PLLC account and pay out check was made from PLLC. PLLC later paid taxes on the that amount. Now K-1 came back to our PA's stating that amount of money came to PLLC as personal contribution and not PA one as we should have done. Is it a major violation and what are the consequences? Do we have to redo K-1s?
Submitted: 2 years ago.
Category: Tax
Expert:  USTaxAdvising replied 2 years ago.

Hello,

 

Based on my understanding of your facts it appears that everything was done correctly from a tax standpoint.

 

We cut 2 bank checks, the money came from our personal accounts since we did not have enough cash in PLLC( it's a start up), checks were deposited to PLLC account and pay out check was made from PLLC. - perfect, you contributed the cash to the company and the company paid the severance package. The members of the company would receive a credit to his/her capital account for the cash contribution. PLLC later paid taxes on the that amount. - yes, this makes sense the company would owe it's share of payroll taxes on the severance package. Now K-1 came back to our PA's stating that amount of money came to PLLC as personal contribution and not PA one as we should have done. - the contribution by the members to the company should be shown as a capital contribution. I am confused by your last statement "and not PA one as we should have done" - what do you mean by this? Is it a major violation and what are the consequences? Do we have to redo K-1s? - based on your facts I believe everything was recorded correctly, no violations here.

 

Let me know about my query above. I don't believe it will change the manner of reporting in any event but it is good for me to get a solid understanding of your facts. Based on the information above it appears all is in good order, no need to amend K1s.

 

Let me know if you have any further questions.

 

Best regards,

 

USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1110
Experience: US Taxation specialist.
USTaxAdvising and 4 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Thank you. Just want to clarify my question. Since the two PA's are 50 %owners of the PLLC does the fact that contributions were made from personal accounts affect owenership %and tax reporting structure of PLLC ? In other words: who owns PLLC now : 2 individuals plus 2 PA's? and does it matter legally speaking? Am I looking to much into it?
Expert:  USTaxAdvising replied 2 years ago.

Who are the members in PLLC? What does PA stand for?

 

I was under the impression that PLLC had two members yourself and your partner.

Customer: replied 2 years ago.
PLLC has 2 owners-two professional associations: 1 medical doctor,PA and 2 medical doctor , PA, each 50 % shareholders. My partner and I are the 2 PA's but not as individuals.
Expert:  USTaxAdvising replied 2 years ago.

Okay and you and your partner contributed to the PA's and the PA contributed to the PLLC?

 

Or

 

You and your partner bypassed the PA's and contributed directly to the PLLC?

Customer: replied 2 years ago.
My partner and I bypassed the PA's and contributed directly to the PLLC
Expert:  USTaxAdvising replied 2 years ago.

Got it. And you are your partner received a K1 from the PLLC? And the PLLC issued K1s to the PA's? (Total 4 K1s issued)

Customer: replied 2 years ago.
Only 2 PA's received k-1s from PLLC, not my partner and I individually.
Expert:  USTaxAdvising replied 2 years ago.

Got it.

 

Now K-1 came back to our PA's stating that amount of money came to PLLC as personal contribution and not PA one as we should have done. - was the contribution from yourself personally recorded as a loan by the PLLC? (i.e. due to Mr.Smith, etc.)

 

I am assuming the contribution was recorded as a loan by the PLLC, payable to you personally. How were the contributions recorded by PLLC? (Due from member? Capital contribution by PA?)

 

Sorry for my repeated questions but I need to understand your facts. There may be a chance that whomever prepared the K1s treated the cash received by you and your partner as a "capital contribution" by you and your partner and thus the PLLC would now have 4 members. (the 2 PA's and 2 individuals)

 

Customer: replied 2 years ago.
Thank you. I think that is what I am saying. Looks like PLLC now has 4 members. I do not believe contribution was recorded as a loan . What is correct next step?
Expert:  USTaxAdvising replied 2 years ago.

Well if it does have 4 members and K1s were issued then you would need to amend the 1065.

 

You have two options to amend:

1. Report the cash payments by you and your partners as loans at PLLC level, not capital contributions. (PLLC owes you these funds back) This is probably the simplest approach. If the cash payments were greater than 10K this would not be advisable as IRS will consider this a below market rate loan and require you to charge the PLLC interest on the loans.

 

2. Report the payments as capital contributions from the PA's. On the PA books record the cash contribution as:

DR to due from member (a receivable) $12345

CR capital contribution $12345

 

Next you need to reverse the due from member to account for the contribution to the PLLC:

DR investment in PLLC $12345

CR due to from member (receivable) $12345

Now you would have zeroed out the member receivable account, recorded the capital contribution, and also recorded the investment in the PLLC.

 

On the PLLC's books record the payments received by you and your partner as capital contributions from the PA's, not yourselves personally. (the is the DR investment in PLLC $12345 transaction)

 

I hope this makes sense.

 

Let me know if you have any further questions.

Customer: replied 2 years ago.
Yes,it does! Thank you very much for your help!
Expert:  USTaxAdvising replied 2 years ago.

Glad I could help. If you ever have any questions in the future please feel free to ask me directly here, if I am not online I will be shortly - http://www.justanswer.com/finance/expert-ustaxadvising/

 

Best regards,

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