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Does personally guaranteeing a loan for an LLC make an LLC

member liable for SE tax...
Does personally guaranteeing a loan for an LLC make an LLC member liable for SE tax? What if the loan proceeds were not used for the business? It was intead used by members to pay off a retiring member but the loan was issued in the LLC name.
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11/1/2012
CGCPA
CGCPA, CPA
Category: Tax
Satisfied Customers: 3,820
Experience: over 40 years experience in tax matters
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Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

A personal guaranty does not make you liable for the SE tax. There are only a few very straight forward items which do. An LLC is an entity which is a hybrid similar to a corporation. Here is a list of the items which can make you obligated for SE tax as taken from the IRS web site. Following that is a link to the web page about this where you can see answers to related matters.

Who is Self-Employed?

Generally, you are self-employed if any of the following apply to you.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

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Customer reply replied 5 years ago


That part I already know. Thanks. What about the proposed regs from 1997? How do they apply in determing whether a member is a limited or managing member? IRS auditor is claiming that the sigining authority for the loan and guaranty make the members laible for SE tax.

I have never heard of such an assertation. It flies in the face of all existing regulations. The 1997 regs did not address this. You may need to appeal the auditors decision unless he/she can substantiate this point.
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Shane-CPA
Shane-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 265
Experience: Shane Northrop is a Certified Public Accountant, Personal Financial Specialist and a Chartered Global Management Accountant
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Hello...my name is XXXXX XXXXX I am a Certified Public Accountant. I look forward to helping you with your question.

I am sorry to hear about your situation with the IRS. My intent is to provide you with the facts and what determines a managing member.

A managing member of an LLC is an individual who holds an ownership interest in the company, participates in its day-to day management and has authority to contract on behalf of the company.

Non-managing members of an LLC do not have authority to enter into contracts on behalf of the LLC.

in general, the earnings of an LLC managing member are considered earned income and are subject to self-employment tax.

I know this probably isn't what you want to hear but I want to provide you with the facts rather than incorrect information that you want to hear.

I hope this provides you with the answers to your question. If I can be of additional service, please let me know. If this completes your question, then I ask that you would please rate me with positive feedback based on the service I provided rather than the negative tax impact. As a professional, we are not compensated unless we receive positive feedback.

I thank you for allowing me to assist you and I look forward to helping you again in the future!

Best Regards,

Shane - CPA
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Customer reply replied 5 years ago

Two of these members do not participate in the day to day management of the business. But they have the ability to enter into contracts and have guaranteed a loan. However, the loan proceeds did not go to the business and were used by the other partners to pay off a retiring partner. The loan is in the LLC name. Does it matter where the loan proceeds go when they can enter into contracts for the business?

Hi...unfortunately it doesn't matter where the proceeds go or what the proceeds are used for. For example, a loan could be taken out by the LLC and then the proceeds distributed to the partner(s) for personal expenses. The key in defining the managing member is what authority they hold in the LLC. Although they may not participate in the day-to-day management of the business, since they have the ability to enter into contracts on behalf of the LLC, the IRS looks at those members as being managing members. Therefore, most income associated with managing members is subject to self-employment tax.

I know it doesn't sound fair. But unfortunately we don't have many options when it comes to the tax code.

The auditor has some authority to waive interest and/or penalties. So even if self-employment tax is being imposed on the members, you might want to ask the auditor if they can work with you on waiving any of the fees.

I hope this helps to answer your question. Please let me know if you would like additional clarification or explanations. Thanks again!
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Customer reply replied 5 years ago


Thank you. One last part.....if the LLC agreement would be for a manager-managed LLC...with two classes of ownership...would this maybe make these two partners managing members and limited members? If so...could the SE tax be applied to only a portion of their LLC income? How would that be allocated?

While an LLC can have separate classes of stock/ownership, the ownership structure may or may not avoid self-employment taxes. For example, if a non-managing member is on payroll for services provided to the LLC, then the payroll will already have payroll taxes associated with it. However, an owner of the LLC, which will generally not be included on payroll, will usually incur self-employment taxes on the net profit of the business. So whether funds are paid out as a distribution, payroll or another method, there will generally be self-employment taxes/payroll taxes assessed to that amount.

If the non-managing members are passive investors to the LLC and have nothing to do with day-to-day management of the LLC, no authority on contracting on the LLC's behalf, etc., then the passive investors would not be subject to self-employment tax. However, passive investors are subject to passive loss limitations, etc. which may or may not be advantageous to that LLC member.
Shane-CPA
Shane-CPA, Certified Public Accountant (CPA)
Category: Tax
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Experience: Shane Northrop is a Certified Public Accountant, Personal Financial Specialist and a Chartered Global Management Accountant
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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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Greetings,

Another expert here with a comment on the validity of those proposed regulations.

The 1997 proposed regulations being discussed are found at http://www.irs.gov/pub/irs-regs/20982496.txt

"(j) Effective date. Paragraphs (d), (e), (f), (g), (h), and
(i) are applicable beginning with the individual's first taxable
year beginning on or after the date this section is published as
a final regulation in the Federal Register."

An argument could be made that these proposed regulations are not applicable since they have not (yet) been published as final.

Of course, each audit and challenge is based on the entire set of facts and circumstances so whether or not to assert the regulations are not final and therefore not applicable should be discussed and considered with your representative.

Hope this helps.
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