Many people have long wondered why ten percent of income is enough for God, yet our earthly rulers demand many times that much.

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This is the latest installment of an ongoing discussion I have been having over the past few years with Ohio CPA Dana Stahl regarding the question of whether LLC members are required to pay the 15.3% self employment tax on their share of the LLC net income. 

 DS:

Mr Guru – I can’t remember if I asked you about this previously.  If so, I apologize for asking again.  Anyway, the new 2004 K-1 has a check box for “general partner/LLC member manager” and another for “limited partner/other LLC member”.  As you know, we’ve discussed repeatedly about the LLC member/SE tax issues, in that those who are Members of a multi-member LLC can opt out of SE tax.  Therefore, how would you recommend we handle which box to check for someone who is actively making a living in an LLC, but not paying the SE tax?  Just go ahead and check the limited partner box?  Let me know.
DS, CPA

Mr Guru – oops, had an additional thought on this.  Is this new set up on the K-1’s just an IRS trick to get LLC Members to start paying SE tax who have previously opted out?  Seems like it to me.
DS, CPA

KMK:

Dana:

Good point about the new descriptions next to the K-1 boxes.  Looking through the IRS’s instructions, they don’t specifically mention any change with LLCs and SE tax; but I think you are right that checking the General Partner box could possibly be used as an admission that the income is subject to SE tax if IRS ever decides to move beyond its current position of having it determined as such voluntarily. 

I think it’s best to stick with the descriptions that they show in the instructions:

It defines general partner as someone who is personally liable for partnership debts.

Limited partners – Members of LLC can be treated as limited partners for certain purposes.  

Since one of the big benefits of LLCs is the protection from personal liability, we can honestly check the limited partner box, which is what I will be doing for those clients who don’t want their LLC income classified as SE.

Kerry

Simplifying the code – Good summary by George Will of the pitfalls and obstacles facing any attempt to simplify the tax system.   I thought I used flowery language when discussing the insane tax mess we have.  However, I have to admit that, after 30+ years in the tax profession, Mr. Will is the first person I can recall referring to income tax as “Satan’s fingerprint.”  I guess that makes my lifelong quest to reduce everyone’s taxes a true fight of good versus evil.

Q:

Dear Sir, I was wondering for head of household if there are 2 separate families living in one house ( address ) can both claim head of household? Sincerely

A:

That is possible.  However, the burden of proving that you both qualify is on you, so keep plenty of documentation.

Here is the relevant explanation from page 1-7 of my new CCH 1040 Express Answers book:

Multiple heads of household may share the same address if they maintain separate households and can provide documentation of that fact.

Gray Area.   Persons sharing the same living quarters are subject to special scrutiny by the IRS if more than one files as Head of Household.  Documentation of separate households is required if two persons with the same address file as Head of Household.  The same qualifying individual may not be used by both.  Records must clearly show which person made all rent, mortgage, utility, and other relevant payments to substantiate the claims.

You didn’t say what state you are in, but my experience has been that some state tax agencies (i.e. California) are actually much tougher in regard to verifying eligibility of taxpayers to claim the HoH filing status.

I hope this helps.  Your personal tax advisor can better evaluate your particular circumstances.

Kerry Kerstetter