IRS Issues Final Regulations for Foreign Owned Single Member LLCs

The Internal Revenue Service (“IRS”) issued final regulations that will increase reporting requirements for certain foreign owned single member limited liability companies (“LLC”). When a single member LLC is formed, for federal tax purposes, it is a disregarded entity by default. This means that income, loss, and subsequent tax obligations will pass through the entity to the owner. The final regulations change the default rule when a LLC is wholly owned by a foreign person, requiring the LLC to be treated as a domestic corporation separate from its owner.

By having these LLCs treated as a domestic corporation, separate from its owner, the LLC must obtain an Employer Identification Number (EIN) and annually file an information return, Form 5472. The LLC must also maintain records of reportable transactions with the foreign owner or foreign related parties. Ultimately, the IRS believes that this will ensure that disregarded LLCs aren’t used by foreign owners to shield assets from the IRS.

Although this change is designed to prevent abusive practices, this has a practical impact for foreign owners of a domestic LLC, ultimately increasing administrative requirements. For further information, the IRS regulation can be found at the following address: https://www.irs.gov/irb/2016-21_IRB/ar19.html

© 2017 Vandenack Weaver LLC
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IRS Announces Increase in De Minimis Safe Harbor Rule for Small Business Capital Expenses

It is a common decision for a small business to not keep audited financial statements, which means they do not get some of the tax benefits given to companies that have “applicable financial statements.” One such tax provision is the amount a company can claim under the de minimis safe harbor for capital items.

The de minimis safe harbor is designed to reduce paperwork and recordkeeping requirements, but still allow business to deduct expenses for improvement in tangible property that would normally qualify as a capital item. Under the previous Internal Revenue Service (IRS) regulation, the small business not keeping applicable financial statements were limited to $500, while those with audited financial statements were allowed up to $5,000. Starting with the 2016 tax year, the small business not keeping audited financial statements will be able to deduct up to $2,500 per invoice under the de minimis safe harbor for expenses to improve tangible property.

What this means for many small business owners is that expenses for the “acquisition or production of new property or for the improvement of existing property” may be deducted if the expenditure is less than $2,500 per invoice. This should ease accounting burdens and paperwork requirements for small business that sought to deduct these types of expenses under the previous rule.

© 2015 Houghton Vandenack Williams
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LLC Owned by Married Couple Generally Not Treated as Disregarded Entity

If an LLC is owned solely by a married couple who file their taxes jointly, the question may arise whether the husband and wife can be counted as one member allowing the company to be treated as a disregarded entity?  This would be beneficial because it would eliminate the need for separate federal and state tax returns for the company.  While there are instances where a husband and wife are counted as one (i.e. in S-corporations), this rule is not applicable towards Nebraska LLC’s.  An LLC solely owned by a married couple will by default be taxed as a partnership and the company will be required to file separate federal and state income tax returns.

© 2012 Parsonage Vandenack Williams LLC

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What is a Disregarded Entity?

If you have formed a limited liability company (“LLC”) by yourself, you may have heard it referred to as a “disregarded entity.”  A disregarded entity is the default tax classification for a single-member LLC.

Disregarded entities are generally treated as nonexistent for tax purposes.  That is, all income, deductions, gains, losses, and credits are reported on the owner’s income tax return.  If the owner is an individual, it is reported on Schedule C of Form 1040 and no separate federal or Nebraska state return is required.  If the disregarded entity has employees, however, then the disregarded entity is responsible for filing and paying all employment taxes on wages paid to employees.

While disregarded entities are largely nonexistent for tax purposes, they remain separate entities for legal purposes.  This means the entity can own real estate, personal property, and the owner will generally have protection from personal liability for business debts.

Overall, a disregarded entity can minimize required tax filings while still enjoying the benefits of legal separation.

© 2012 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com