Late S election


W

Wayne Rivers

Question:

An LLC formed back in 2004 and I believe started operating
as a partnership with two partners. Unfortunately, one of
the "partners" was paid payroll with taxes taken out for
work she performed in the partnership (instead of taking
guaranteed payments). The other (main) partner was not paid
and the company did not make money. Since they really were
really operating as an S-corporation and withholding taxes
as they went, we requested to be taxed as an S-corporation
for both years under Rev Proc 2004-48. The IRS denied the
request because the request wasn't received within 6 months
after the due date of the 2004 return.

1. How could we file a partnership return with one of the
partners receiving wages?

2. Since the IRS doesn't really know who the partners are
yet, what about filing the partnership return with the K-1
going to the partner's (who received wages) husband?

3. If neither of these would work, would it be beneficial to
request a Private Letter Ruling?

Thanks for any input.

Wayne Rivers, CPA
 
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Harlan Lunsford

Wayne said:
Question:

An LLC formed back in 2004 and I believe started operating
as a partnership with two partners. Unfortunately, one of
the "partners" was paid payroll with taxes taken out for
work she performed in the partnership (instead of taking
guaranteed payments). The other (main) partner was not paid
and the company did not make money. Since they really were
really operating as an S-corporation and withholding taxes
as they went, we requested to be taxed as an S-corporation
for both years under Rev Proc 2004-48. The IRS denied the
request because the request wasn't received within 6 months
after the due date of the 2004 return.

1. How could we file a partnership return with one of the
partners receiving wages?

2. Since the IRS doesn't really know who the partners are
yet, what about filing the partnership return with the K-1
going to the partner's (who received wages) husband?

3. If neither of these would work, would it be beneficial to
request a Private Letter Ruling?
You've got a hard row to hoe. Been there done that.
Except this was before LLC's. In my client's case, he told
me corporation, found out no corporation was filed, had to
go back and amend 941's to zero, then coax IRS to transfer
the money paid in into his personal 1040 account. But it was
done.

Here you'll have to do same for the 941's filed for 2004
into that faux employee's personal account; or maybe get
refunds. Then file the 1065 with no wages of course and
take it from there with inevitable penalties and interest.

Glad it's not me. (grin

ChEAr$,
Harlan Lunsford, EA n LA
 
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Paul Thomas, CPA

Wayne Rivers said:
An LLC formed back in 2004 and I believe started operating
as a partnership with two partners. Unfortunately, one of
the "partners" was paid payroll with taxes taken out for
work she performed in the partnership (instead of taking
guaranteed payments). The other (main) partner was not paid
and the company did not make money. Since they really were
really operating as an S-corporation and withholding taxes
as they went, we requested to be taxed as an S-corporation
for both years under Rev Proc 2004-48. The IRS denied the
request because the request wasn't received within 6 months
after the due date of the 2004 return.

1. How could we file a partnership return with one of the
partners receiving wages?
As Nike ads go, "Just do it". Most likely the net tax
impact is going to be in favor of the government (FUTA and
SUTA tax being paid on those wages).

No, it's not "right", but it is what happened.
2. Since the IRS doesn't really know who the partners are
yet, what about filing the partnership return with the K-1
going to the partner's (who received wages) husband?
Nope. Keep the K-1's going to the partners. Send the W-2
to the partners.
3. If neither of these would work, would it be beneficial to
request a Private Letter Ruling?
It's probably not worth the effort and cost.

I have a partnership LLC that added a new member a few years
back who, earlier that year, was an employee of the
partnership. Now, they received a W-2 as well as a K-1 in
that year. They since have received a K-1 only.

The point being, no one at the IRS or the state will care on
this topic. No taxes are being dodged to any degree, and
there are unemployment taxes being paid on "wages" that
might not otherwise be subject to those taxes.

Fix it for 2007 and move on.

Otherwise, go back and amend all the 941's and get the
payroll taxes refunded. If you do, remember that that
partner might now be underpaid on estimated tax.
 
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Harlan Lunsford

As Nike ads go, "Just do it". Most likely the net tax
impact is going to be in favor of the government (FUTA and
SUTA tax being paid on those wages).

No, it's not "right", but it is what happened.
AS you say, it's not right, and that is why is should be
corrected. Partners do not receive W2 forms and are not paid
wages.

ChEAr$,
Harlan Lunsford, EA n LA
 
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Stuart A. Bronstein

Harlan Lunsford said:
AS you say, it's not right, and that is why is should be
corrected. Partners do not receive W2 forms and are not paid
wages.
How would it be treated, then, if the partners don't put in equal time
and efforts, and have agreed to be paid in part based on the number of
hours they work?

Stu
 
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Paul Thomas, CPA

Stuart A. Bronstein said:
How would it be treated, then, if the partners don't put in
equal time and efforts, and have agreed to be paid in part
based on the number of hours they work?
Generally through "Guaranteed Payments" to those partners.

Guaranteed payments do not have to be paid equally to the
partners according to their ownership.
 
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Harlan Lunsford

How would it be treated, then, if the partners don't put in equal time
and efforts, and have agreed to be paid in part based on the number of
hours they work?
You mean members; not partners. If the operating agreement
of the LLC so specifies, then those corrections will also
have to be made. or should be made.

ChEAr$,
Harlan Lunsfod, EA n LA
 
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Stuart A. Bronstein

Generally through "Guaranteed Payments" to those partners.

Guaranteed payments do not have to be paid equally to the
partners according to their ownership.
So guaranteed payments are like salary, but treated as
partnership distributions. Thanks. I wasn't aware how that
worked.

Stu
 
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