Key legal, tax and financial decisions should be acted on by the members and documented in the minutes at least annually. Key decisions include: admitting new members, the purchase of real property, the approval of a long-term lease, the authorization of a significant loan amount or substantial line of credit, the adoption of a retirement plan, health plan, etc. These, and other key decisions, should also be backed by the supporting documentation. Documentation of business decisions within your minutes helps to protect the limited liability of your business and insulate you from personal liability. If you fail to pay at least minimal attention the formalities of having a separate business entity, you may lose the limited liability protection of your LLC. A "paper trail" can be important if disputes arise. Minutes provide solid documentation in the event key decisions are questioned or reviewed later by the IRS, members, creditors or the courts.
Members are allowed to treat company debt as basis in some cases. This allows a member to deduct losses in excess of their tax basis. A member is allocated any LLC debt for which they bear an economic risk of loss, plus their share of any debt for which none of the other members specifically bear an economic risk of loss. However, these rules are technical and we suggest you contact us for specifics related to your situation. Please keep copies of all loan documentation, especially guarantees, so that members' basis can be accurately calculated.
It is very important that loans between members and the Company are evidenced by a written promissory note with terms and a stated interest rate. Without such documentation, the IRS has disallowed the use of such loans as basis for deducting losses. Please be sure to prepare notes for all new loans and old notes are cancelled when paid.
Reasonable compensation for members and the related payroll taxes is a "hot topic" with Congress and the IRS. Because member's guaranteed payments are subject to FICA taxes, it is possible that Congress will try to pass legislation to force members to pay more in "payroll" taxes. The IRS may try to assert that all business LLC income is taxable for self-employment taxes. Making guaranteed payments of a reasonable amount may help beat the IRS's contention. The rules on whether LLC members are subject to self-employment taxes on LLC profits (the amount of income left after guaranteed payments) are in a state of flux. The current IRS thinking is that if the member services for the LLC for more than 500 hours per year, or is liable for LLC debts, or has authority to contract on behalf of the LLC, they are subject to self-employment taxes. Please let us know if this could apply to any of your LLC members and you would like some additional information regarding this issue.
Health care and group term life benefits should be included in the member's guaranteed payments. The LLC deducts the guaranteed payments while the member includes the amounts in income. Health care amounts are then fully deducted on the member's individual return.
Contributions to an HSA account by a LLC on behalf of a member are to be reported as guaranteed payments to the member or as member draws. The member will deduct the amount contributed to the HSA on their individual return as if they made the contribution personally.
You can deduct on your individual tax return certain expenses you pay personally conducting LLC business, such as automobile and home office expenses. The LLC agreement must indicate that the members are required to cover these expenses. You should check your agreement and change it if necessary. This could allow you to depreciate your vehicle or take a mileage deduction and deduct certain expenses you incur maintaining a home office. If your LLC agreement does not indicate such items are required, submitting an expense report for eligible expenses allows the LLC to reimburse you the costs and take the deduction on the LLC return. If under the LLC agreement you are eligible to submit expenses for reimbursement, you are precluded from taking a deduction on your personal return for any amounts paid out of pocket. Contact us to for assistance in analyzing your situation.
The IRS and State agencies are asserting members/managers of LLCs are liable for various payroll, excise and other taxes and penalties. Generally such persons have been not been considered liable, but recent cases have shown otherwise. In addition, payroll taxes of LLCs must now be reported using the LLC's federal identification number instead of the member's social security number. Please make sure your LLC is paying all appropriate taxes on time. Contact us or your attorney if you have questions.