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Tax Preparation

If the LLC (or other entity you may use) is required to file a tax return or make other filings, it is important to utilize tax professionals who are experienced and knowledge regarding the required tax filings.

Our attorneys are not only knowledgeable about tax law, but use that knowledge to prepare tax returns for many of our clients. This is very useful should our client face a tax audit or need to challenge any adverse decision of the IRS.

We prepare individual, partnership, and corporate returns. Below are the situations in which tax returns are required to be filed:

LLC with More Than One Owner and No UBTI and UDFI. The IRS treats a LLC with more than one owner as partnership 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. This means that as the partnership earns income, it passes the tax liability of that income back to its owners. The partnership itself does not pay taxes. Every partnership must file an informational tax return, and prepare income statements for all the owners of the company. The return itself is IRS Form 1065; the income statement to the owners is Schedule K-1 and is prepared by the LLC. This filing requirement is particularly important if one of the partners is an individual or a non IRA entity.

In the case of a Self-Directed IRA that is one of the owners of a LLC, the LLC would file a Form 1065 with the IRS to report the earnings of the LLC. However, no tax would be due as a LLC treated as a partnership incurs no tax itself. Also the LLC would complete Schedule K-1 forms for each owner of the LLC. The K-1 forms would show the respective share of the income for each owner. The IRA owner is not taxable on the income reported on the K-1 (as a tax-exempt entity) and does not have to file a federal “income tax” return.

UBTI or UDFI. If a LLC owned by an IRA incurs UBTI or UDFI the Form 990-T must be completed to report the income and pay the tax. It is generally only these two instances that give rise to taxable income for the Self-Directed IRA.

UBTI is income from a trade or business regularly carried on by the IRA which is not substantially related to the IRA’s tax-exempt purpose. Notably income from rental property is NOT considered UBTI
UDFI occurs when the IRA receives (either directly or indirectly through a “flow-through” entity, like an LLC) income from “debt-financed” property. For example, if an IRA purchases real estate using a non-recourse loan for 60% of the purchase price, 60% of the income generated from the investment will be subject to taxation. This represents the debt-financed portion of the investment.

As the LLC is a “pass-through” entity and pays no tax, the tax is owed by the Self-Directed IRA. It is the account owner of the IRA that has the responsibility to prepare the Form 990-T. Since the tax is owed by the Self-Directed IRA, the return is prepared under the name of the Self-Directed IRA using the EIN of the IRA. It must be emphasized that tax must be paid only from funds held by the Self-Directed IRA.

Corporate Taxation. Only if a client has invested in a business using a C corporation will the client have to be concerned with filing a corporate return. Income earned by a C corporation is fully taxable (unlike income earned by an IRA owned LLC which is not taxed at the LLC level, but is passed tax free to the IRA).

Corporate taxation can be particularly complex and our clients can benefit from our expertise in this area.