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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28082
Experience:  Taxes, Immigration, Labor Relations
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I have an LLC, (90% ownership) expecting to receive $30

Customer Question

I have an LLC, (90% ownership) expecting to receive $30 millions as partial payment of a project. As soon as money is receive (first $30 millions), project will star rolling expecting to be finish within one year. Upon completion another $30 millions more will be received.
Question: Tax implications ($) will represent to my LLC this first $30 millions, do I have to pay taxes on this first $30 millions if is so, is there any legal way of minimizing the tax issue.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

If you are cash based taxpayer - income is recognized when received - regardless when the actual work is done.
If you elect accrual accounting - you will be taxed when the work is done.
So if the work will be completed in the following tax year - and you expect large deductible expenses - accrual accounting method might be more beneficial.
Another issue is related to net business income. As you might know only net business income is taxable that is (gross income) MINUS (qualified business expenses).
As most likely you will have large deductible expenses related to the project - you might want to plan these expenses wisely and spread expenses evenly or the most beneficial way.
And finally - we need to verify tax classification for your LLC.
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations.

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC owner s tax return (a disregarded entity).

An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes.

As you have an LLC with several members - it is treated as a partnership - means net income is passed to partners according to the agreement - and will be subject to both income and self-employment tax on individual tax returns.

With large taxable income - it might be more beneficial to elect the LLC to be treated as S-corporation - in this case a part of income will be paid as wages (subject to employment taxes - similar to self-employment taxes) and another part will be passed to shareholders and will be subject ONLY to income tax - thus there is potential tax saving.

And finally - we may defer some tax liability by making contributions into qualified retirement plan.
Such contributions however are limited - but there might be some tax saving.

Expert:  Lev replied 1 year ago.

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