LLC taxation as a partnership


R

rdrnws

Hi,

me and my partner are considering forming an LLC in
Virginia. He is a state resident, I am a non-resident alien.
We were wondering about the following taxation issues.

1. Based on his profit share reported on the LLC's 1065,
will my partner pay federal taxes, state taxes, or both?

2. Do I have to pay federal taxes, state taxes or both
(remember I am a non-US citizen residing abroad)?

If that matters, the LLC will be providing services in all
50+ states and abroad.

TIA,
Nikolas

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
Ad

Advertisements

K

Katie

rdrnws said:
me and my partner are considering forming an LLC in
Virginia. He is a state resident, I am a non-resident alien.
We were wondering about the following taxation issues.

1. Based on his profit share reported on the LLC's 1065,
will my partner pay federal taxes, state taxes, or both?
Both. In fact, he will pay state income taxes to every
state where the LLC provides services, assuming someone
physically goes to the other state to provide the services.
Virginia will tax 100% of his income from the LLC, and will
give him credit for the taxes he pays to the other states
(with some exceptions).
2. Do I have to pay federal taxes, state taxes or both
(remember I am a non-US citizen residing abroad)?
Yes, both, and to all states where the LLC provides
services. You will have income effectively connected with a
U.S. trade or business, and income with a source in all the
states where the LLC's activities are taxable. Your home
country may give you credit for the U.S. federal income tax.
If that matters, the LLC will be providing services in all
50+ states and abroad.
Oh, yes, it matters. If all of the services are actually
performed in Virginia or in a foreign country, then Virginia
will be the only state that can tax any of your distributive
share of the income. The LLC, and its members, will be
taxable in every state where its members, employees or
representatives perform services.

Katie in San Diego

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
R

rdrnws

Yes, both, and to all states where the LLC provides
services. You will have income effectively connected with a
U.S. trade or business, and income with a source in all the
states where the LLC's activities are taxable.
Would a "foreign earned income" exclusion via form 2555
apply to me? In a recent thread ("Schedule C Earned Income -
Excluded as Foreign Earned Income"), the general consensus
was that the OP (american citizen living in Japan and
running his Delaware-based LLC from over there) would be
entitled to a federal tax break.

Would the same apply to a non-US citizen living abroad and
partnering in a US LLC?

Thanks again,

Nikolas

Schedule C Earned Income - Excluded as Foreign Earned Income

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
K

Katie

Would a "foreign earned income" exclusion via form 2555
apply to me? In a recent thread ("Schedule C Earned Income -
Excluded as Foreign Earned Income"), the general consensus
was that the OP (american citizen living in Japan and
running his Delaware-based LLC from over there) would be
entitled to a federal tax break.

Would the same apply to a non-US citizen living abroad and
partnering in a US LLC?
No, the IRC Sec. 911 exclusion would not apply to you for at
least two reasons: (1) it is available only to U.S.
citizens or residents; and (2) your income from this
activity would not be "foreign earned income" since it would
be earned in the U.S.

In the previous thread, the OP was working for his LLC in
Japan, so his income was earned in a foreign country.

Katie in San Diego

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
R

rdrnws

No, the IRC Sec. 911 exclusion would not apply to you for at
least two reasons: (1) it is available only to U.S.
citizens or residents; and (2) your income from this
activity would not be "foreign earned income" since it would
be earned in the U.S.

In the previous thread, the OP was working for his LLC in
Japan, so his income was earned in a foreign country.
One small clarification please : I am clear with reason (1)
above, but if I am going to be doing work for the LLC from
Europe, I do not see why item (2) above would apply. The
previous poster was living in Japan but working for a US
LLC. I guess I am trying to clarify whether "foreign earned"
denotes the geographical location of the earner rather than
the geographical source of the income.

BTW, what is the title of the IRS publication you are citing
above? Thanks again,

Nikolas


<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
R

rdrnws

No, the IRC Sec. 911 exclusion would not apply to you for at
least two reasons: (1) it is available only to U.S.
citizens or residents; and (2) your income from this
activity would not be "foreign earned income" since it would
be earned in the U.S.

In the previous thread, the OP was working for his LLC in
Japan, so his income was earned in a foreign country.
One small clarification please : I am clear with reason (1)
above, but if I am going to be doing work for the LLC from
Europe, I do not see why item (2) above would apply. The
previous poster was living in Japan but working for a US
LLC. I guess I am trying to clarify whether "foreign earned"
denotes the geographical location of the earner rather than
the geographical source of the income.

BTW, what is the title of the IRS publication you are citing
above? Thanks again,

Nikolas

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
Ad

Advertisements

K

Katie

One small clarification please : I am clear with reason (1)
above, but if I am going to be doing work for the LLC from
Europe, I do not see why item (2) above would apply. The
previous poster was living in Japan but working for a US
LLC. I guess I am trying to clarify whether "foreign earned"
denotes the geographical location of the earner rather than
the geographical source of the income.

BTW, what is the title of the IRS publication you are citing
above? Thanks again,
You are correct that "foreign earned" refers to the location
of the earner. However, your distributive share of income
from this LLC would not be "foreign earned" income for
purposes of Sec. 911, since it arises from your ownership of
an interest in the LLC, not from your personal services.

You could receive a guaranteed payment commensurate with the
value of the services you provide for the LLC. That amount
would be paid to you and subtracted from the LLC's income in
arriving at the members' distributive shares. Your
guaranteed payment would be eligible for the 911 exclusion;
your distributive share of the remaining income would not.
See Sec. 911(d)(2) and Carey v U.S. (1970) 25 AFTR2d 70-1395
, 192 Ct Cl 536 , 427 F2d 763 , 70-1 USTC. =B69455.

I did not cite any IRS publication. I cited the Internal
Revenue Code, Sec. 911 - specifically, Sec. 911(b)(1)(A),
which defines "foreign earned income," and Sec. 911(d)(1),
which defines a qualified individual.

Since you are not a citizen or resident of the U.S., you
would not meet the definition of a qualified individual. As
a result the definition of "foreign earned income" is
academic, because you would not qualify for the exclusion.

Katie in San Diego

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top