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Old 07-06-2013, 05:41 PM
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1099 misc and LLC's

Hi All,
New here so I ask for a bit of patience. Your responses to questions from others has helped me greatly.

On point then:

My son and I are floor installers. We are both officers in an LLC that we formed together. We are the only members of the LLC. Our LLC is registered with the state of Minnesota and has a registered EIN with the IRS. My son is registered as the senior officer.
We received four 1099 misc forms for sub-contract work we performed in 2011 from four different companies.
Some of the work we performed together and some individually.
As such we decided to split the 1099's in half. Two for him and two for me. We filed our personal 1040's using the income from the 1099 misc forms.

I received notification from the IRS that my son's income was not associated to the two 1099 misc forms that we used for his part of the earnings of our LLC.
Instead it is their understanding that I failed to include the two 1099's used by my son as my income. They apparently have not associated these two 1099's to his income.
The IRS would like the subsequent tax/penalty/interest on this so called undeclared amount which at this writing is $10,991.

My dilemma is how to respond to the IRS. Is there a form that I should include in my response?
I have to respond by 7/31/13.
As it is I intend to lay out the explanation much as I have here.

Any help or insights you have will be greatly appreciated.
Thanks much.
Cliff



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Old 07-07-2013, 03:14 AM
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The IRS has released proposed regulations regarding income allocation when partnership interests /profts are transferred or partners have varying interests/profits for other reasons. The IRS has requested comments on whether additions should be made to the list of extraordinary items that require proration as of a specific day and on whether other allocation methods and conventions should be permitted under the regulations.The IRS also requests comments regarding the application, under the new regulations, of a special consolidated-return regulation rule (Treasury Regulation Section 1.1502-76(b)(2)(vi)(B)).

I guess one way is to submit copies of your operating agreement of the llc.As you can see, a LLC is not a separate tax entity like a corporation; instead, it is what the IRS calls a "pass-through entity," like a partnership in your case. All of the profits and losses of the LLC "pass through" the business to the LLC owners , members, who report this information on their personal tax returns. The IRS treats co-owned LLCs as partnerships for tax purposes. Like one-member LLCs, co-owned LLCs do not pay taxes on business income; instead, the LLC owners each pay taxes on their share of the profits on their personal income tax returns (with Sch E attached). The LLC operating agreement can provide for special allocations of most items of income and deduction.A business can divide profits and losses in a way that is not proportionate to the owners' percentage interests in the business, it is called a "special allocation." The IRS pays careful attention to special allocations to be sure business owners are not trying to hide potential tax dollars, by allocating all business losses to the owner in the highest income tax bracket. If the IRS does not accept a special allocation that you make, it will tax you and your co-owners as if your distributive shares are in proportion to your ownership interests, regardless of what your partnership or operating agreement says.
To be certain that a special allocation is legitimate, the IRS checks to see if it has what it calls "substantial economic effect." This jargon means that a special allocation must be based on real economic factors of the owners' circumstances, not used to simply shift income around to reduce an owner's income taxes


Most operating agreements provide that a member's distributive share is in proportion to his or her percentage interest in the business. For instance, ifyou own 60% of the LLC, and son owns the other 40%, youwill be entitled to 60% of the LLC's profits and losses, and son will be entitled to 40%. If you'd like to split up profits /losses in a way that is not proportionate to the members' percentage interests in the business, it's called a "special allocation." However members' distributive shares are divvied up, the IRS treats each LLC member as though the member receives his or her entire distributive share each year. This means that each LLC member must pay taxes on his or her whole distributive share, whether or not the LLC actually distributes all (or any of) the money to the members. The practical significance of this IRS rule is that, even if LLC members need to leave profits in the LLC , for instance, to buy inventory or expand the business ,each LLC member is liable for income tax on his or her rightful share of that money.

So,Your LLC operating agreement, which is similar to a corporation's bylaws, lays out the structure and governing principles of the business. While family LLCs are legally no different from typical LLCs, your operating agreement provides family members the flexibility to create the organization in the manner best suited for your needs. The operating agreement recognizes the formation and purpose of the family LLC and also denotes the LLC's fiscal year and income tax status. This tax section is particularly important for family LLCs with only two members who are a son and a father. As spelled out in the operating agreement, the percent ownership of each family member is usually determined by the initial capital contribution. Further, the operating agreement specifies how distributions of cash or other revenue will be made to its members.I guess you need to contact the IRS for more info in detail.



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Old 07-07-2013, 08:46 AM
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Join Date: Jul 2013
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Wnhough,
Thanks much for your full length explanation and well structured reply to my situation.
I see that part of my problem has occurred because I did not file a Schedule E. Was unaware of my need to as I relied upon Turbo Tax to sort out which forms were appropriate for my needs based upon the info I supplied.
You have also pointed out some issues regarding allocation of monies and subsequent tax responsibilities that I was also unaware of.
Again thanks so very much for sharing your time and knowledge.
Cliff



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Old 07-07-2013, 08:51 AM
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You are very welcome and as mentioned, i guess you can contact the IRS for more accurate/ detailed info on the isue. Good luck~~



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Old 09-15-2013, 11:45 PM
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Was this issue resolved? How did it go?



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