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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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A LLC is owned by a corporation and an individual. The

Customer Question

A LLC is owned by a corporation and an individual. The corporation will file the consolidated tax return at the year end because it has 80% of the ownership in LLC. The LLC will not file the tax return. The individual owns 20% of the LLC and entitle $50,000 guranteed payment. How does the individual to report his income since the LLC will not file the tax return and no k1 will be issued. Does the individual need to form a company to deal this situation?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

In order to file a consolidating tax return - the LLC must be classified as a corporation - and otherwise woudl be filing a corporate tax return as C-corporation.

So instead of filing two corporate tax returns - the parent corporation may file one consolidated tax return.

That is based on section 1501

https://www.law.cornell.edu/uscode/text/26/1501

An affiliated group of corporations shall, subject to the provisions of this chapter, have the privilege of making a consolidated return with respect to the income tax imposed by chapter 1 for the taxable year in lieu of separate returns.

See regulation here

https://www.law.cornell.edu/cfr/text/26/1.1502-1

.

If the LLC is classified as a partnership under the default classification rules (because there are two members) - it should file a partnership tax return and is not eligible for the consolidating tax return.

If S-corporation elected to be taxed as C-corporation - then shareholders will receive dividends taxable on their tax return.

Also the shareholder who is an employee of that corporation will receive wages - not guaranteed payments.

Customer: replied 1 year ago.
In my case, the LLC should select as a C Corporation and let the parent corporation file the consolidated tax return. And the other shareholder will be paid by the salaries. If the LLC has the profit, it could pay the dividends to the shareholders. Do I need to file a form with IRS to claim that LLC will be treated like a C corporation? If so, what form should I file?
Expert:  Lev replied 1 year ago.

If you want to be eligible for the consolidated tax return - yes - both entities must be C-corporations.
When the LLC (elected to be treated as C-corporation) has a business profit - it will be subject to corporate income tax - but on the consolidated tax return if you choose that route.

The LLC (C-corporation) will pay dividends to shareholders from after tax profit. These dividends are reported on form 1099DIV.

To elect the LLC to be classified as C-corporation - a special election must be done. Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.

https://www.irs.gov/pub/irs-pdf/f8832.pdf

For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.

https://www.irs.gov/pub/irs-pdf/p3402.pdf

Any questions?

Expert:  Lev replied 1 year ago.

.

Expert:  Lev replied 1 year ago.

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