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Anne
Anne, Master Tax Preparer
Category: Tax
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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Can you give me a general discussion of inconsistency in interpretation

Customer Question

Can you give me a general discussion of inconsistency in interpretation of Internal Revenue Regulations on the part of the Internal Revenue Service by citing some examples?
Submitted: 1 year ago.
Category: Tax
Expert:  Anne replied 1 year ago.
HI

Thank you for using justanswer.

It would be much easier if you gave us some background and a specific area you were looking for, such as how to handle dividends, self employment income, etc.

That way we can be more specific, and our answers will be tailored to your area that you want explained.
Customer: replied 1 year ago.

How about whether ordinary income received by LLC members is subject to self-employment tax? There seems to be a lot of controversy surrounding this topic.

Expert:  Anne replied 1 year ago.
Ok........I'm assuming you're speaking about a Partnership.

First, there must be at least one "General Partner". A General Partner is the partner that has responsibility for the actions of the business, and is personally liable for all the business's debts and obligations.

He is also the person who runs the day to day activities, providing the services that generate income for the partnership.

Since the General Partner(s) provide the service that generates the income for the partnership, their % of the partnership income at the end of the year is subject to SE tax.

Then you may or may not have individual(s) that receive "Guaranteed Payments"

Guaranteed payments essentially function as a form of salary for partners. This income may be subject to self-employment tax, depending on the terms of payment. Guaranteed payments are considered first-priority distributions and will be paid out even if the partnership is losing money.

Finally you may have one or more "Limited Partners". These are the equivelent of what used to be called "silent partners".

Limited Partners invest a certain amount of $, but that is the end of their contribution to the Partnership. They have nothing to do with the day to day activities of the Partnership. They are paid out of the Partnership's net earnings based on their investment %. Limited Partners never pay SE tax on their earnings, since they offer no services to the partnership.

I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me. Guaranteed payments essentially function as a form of salary for partners. This income may be subject to self-employment tax, depending on the terms of payment. Guaranteed payments are considered first-priority distributions and will be paid out even if the partnership is losing money.






Expert:  Anne replied 1 year ago.
I'm afraid that I did not make my answer re: partners receiving "ordinary income" quite clear enough.

The ordinary income that is reported on the individual's K1, line 1, will be subject to SE for those persons I described above (General Partners and those that receive guaranteed payments) you may have to make adjustments on the SE form (for example, subtracting any Section 179 from an asset that was purchased by only 1 of the partners)

However, the ordinary income is still NOT subject to SE for the "limited partners".

I sincerely XXXX XXXX this makes the answer more in keeping with your exact question.

Thank you for the opportunity for working with you, and please let me know if you have any additional questions.

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