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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 3372
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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My wife and I are establishing an LLC in GA with partnership

Customer Question

My wife and I are establishing an LLC in GA with partnership tax structure. The planned long-term membership split is 50/50. However, for 2016 we have an unusual situation with respect to 401k contributions and revenue to be billed through the LLC. The majority of billing to be done through the LLC was for worked my wife performed. Additionally, I maxed out my 401k individual contributions with a previous employer earlier in the year, and we want to maximum her contributions to a 401k for this year. However, the 50/50 split seems to complicate that. From a legal/IRS position is it unreasonable to start a LLC with 90/10 owner split in 2016 & then adjust to 50/50 in 2017? An alternate approach seems to have some revenue attached to her as a sole proprietor for this year versus running through the LLC (the complication here seems to be that multiple 401k plans would have to be created).
Submitted: 9 months ago.
Category: Tax
Expert:  Barbara replied 9 months ago.

Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

The distributive share of each partner is determined by the partnership agreement. In the absence of a written partnership agreement, the partnership's profits will be split evenly.

A special allocation is when a partnership decides to allocate shares of profits in a way that's different from that specified in the partnership agreement, or in unequal shares for a partnership that doesn't have a written agreement.

For example, if you've been splitting profits equally with your partner but then decide to split them 60/40 one year, you may do so, but your reason must be for a substantial economic reason (perhaps your partner took an extended period off to travel and therefore didn't work as much). If it's not, and the IRS determines that the change was made primarily to lessen the aggregate tax burden of the partners, then the IRS will re-allocate the special allocation and you'll have to pay taxes according to your regular schedule.

The following link contains excellent information you will find helpful:

http://smallbusiness.findlaw.com/incorporation-and-legal-structures/partnership-taxes.html

Please let me know if I can assist you further.

Thank you and best regards,

Barb

Customer: replied 9 months ago.
Thank you for your response. I have read the link you sent. I want to make sure I understand properly so I can move forward on all this. As I mentioned, the LLC is new for 2016 and is being created with a 50/50 allocation. For 2016, my wife's portion of the revenue created is virtually all of incoming cash flow (90% or more). So while doing a special allocation of something like 90/10 for this year is consistent with that, we do plan to leverage that position to maximize her contributions to a 401k this year. On one hand, this clearly will lessen the tax burden but on the other it is consistent with the business environment. Would a 'special allocation' created in case be defendable with the IRS if ever needed?
Expert:  Barbara replied 9 months ago.

Based on the information you have provided, yes.

Expert:  Barbara replied 9 months ago.

Just following up with you to see if you have any other questions or concerns. If so, please let me know so I can further assist you.

Best regards,

Barb