For two member LLC, want only part of business income taxed as SE income. (taxed part will be guaranteed payments) How to show on 1065

[Just-Lisa-Now-]

Is it wrong to laugh when a client only wants part of their income to be taxed?

[TaxMonkey · Accepted solution]

Income bifurcation in an LLC is an aggressive tax strategy which may have some merits, but I would approach it carefully.  Mechanically you would set up separate K-1s for the limited partner interests and for the general partner interests.  As a limited partner you would not be subject to SE tax, as a general partner you would.

Here is an IRS PLR which is on point - they concluded in this case that the partner did not have a limited partner component ans were fully subject to SE tax on all income.  However, they reference all the major case law on the subject:

https://www.irs.gov/pub/irs-wd/201640014.pdf

Here is another article that suggests the mechanisms and tests based on the 1997 proposed regulations - never finalized - which describes when an LLC interest could be treated as a limited partner interest.

https://www.bauer.uh.edu/jmeade/articles/CPA%20Journal%20June_2006.pdf

[sjrcpa]

LLCs do not have General and Limited Partners

[TaxMonkey]

Your statement is short and to the point, but lacks the nuances discussed in the above references as to when an LLC member may be treated as a limited partner under IRC 1402 and the associated proposed treasury regulations.

[sjrcpa]

OK