The limited liability company provides entrepreneurs and business owners with wonderful tax planning options. And, interestingly, a handful of these options can even be considered at nearly the very last minute. Consider, for example, the following tactics and techniques:
Deduct Unreimbursed Partnership Expenses for Multiple Member LLCs
If a limited liability company has multiple members and is treated for tax accounting purposes as a partnership, the LLC may want to develop an “unreimbursed partnership expenses” policy that requires partners to directly pay some of their business expenses.
Such a policy, which ideally should be writing but also could be a verbal agreement, would mean that partners (LLC members) can deduct on their 1040 returns any of these unreimbursed partnership expenses.
The textbook example of unreimbursed partnership expenses is probably a partner in a law firm deducting a costly law book only he or she will use.
You can, however, cleverly expand a “partners pay” policy to include all sorts of expenses that legitimately relate to the partnership activity but that partners should deduct themselves because there’s too much awkwardness if the partnership pays.
For example, a consulting partnership might decide that individual consulting partners should pay for their own practice development, meals and entertainment or travel expenses.
Special Allocations of Partnership Items for Multiple Member LLCs
As just mentioned, a multiple member limited liability company may be treated as a partnership for tax accounting purposes and that would mean that the LLC would use partnership profit and loss sharing formulas to allocate partnership income and deductions.
Interestingly, this accounting treatment creates another last-minute tax planning opportunity. While two partners may initially intend on sharing partnership profits and losses fifty-fifty, if that allocation turns out not to make sense, the allocation probably also screws up one or both of the partners’ individual tax returns. Such a screw-up may occur for example when the originally planned accounting under-allocates income or deductions to one partner and then over-allocates these items to another partner.
LLC members (the “partners”) will need to discuss any special allocations before the tax return gets prepared, but a pre-tax-return-preparation discussion of how to allocate income or a loss can be very effective for reducing taxes. The allocation needs to make sense economically (you can’t just allocate to reduce people’s taxes). But if you, for example, allocate losses to the partner contributing money or allocate profits to partners who have previously borne the brunt of losses, the special allocation often reduce taxes.
Make a Late Subchapter S election
One final tip can be considered in some special circumstances. Both LLCs treated as partnerships and LLCs treated as sole proprietorships can consider making a late election to have the LLC taxed as an S corporation.
Technically an LLC should make a Subchapter S election by the fifteenth date of the third month of the tax year. But if the election wasn’t made for some reason like a mix-up about who was supposed to file the paperwork, you may be able make a late election. Right now the IRS is very, very forgiving about late Subchapter S elections. Ask your tax advisor if you have questions about how to do this.
