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LLCs and S Corporations: Mitigating Self-Employment Tax for Flow-Through Entities

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, February 6, 2024

Recorded event now available

or call 1-800-926-7926

This course will assist tax professionals in determining whether flow-through income should be subject to self-employment tax. Our veteran pass-through entity panelist will explain how reasonable compensation, payments to partners, and management authority status affect whether an owner's distributive share of income from a pass-through entity is subject to self-employment tax. He will examine how the recent Soroban case impacts self-employment tax and limited partners.

Description

Tax advisers struggle with whether a partner's or member’s distributive share of income is subject to self-employment tax. Recently, in Soroban Capital Partners LP et al. v. Commissioner, 161 T.C. No. 12 (2023), the tax court sided with the IRS and ruled that determining whether a partner is a limited partner, and therefore subject to self-employment tax, should be made based on the level of activity of the limited partner in the partnership.

Tax advisers often reflexively recommend electing S corporation status solely to mitigate self-employment tax. Before making such an election, tax advisers and their clients need to carefully weigh the potential disadvantages of S corporation status against a realistic estimate of the potential self-employment tax savings and against alternative structures and reporting positions that would allow the LLC members or partners to avoid self-employment tax on their distributive share income.

Listen as our self-employment tax expert explains, based on current law and recent cases, what income from flow-through entities can be reported as exempt from self-employment income and the implications for structuring and classifying business entities. The panel will also highlight possible legislative changes on the horizon.

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Outline

  1. Overview of self-employment tax on pass-through income
  2. S corporations
    1. Self-employment tax considerations
    2. Reasonable compensation
    3. Weighing S corporation status
  3. LLCs and partnerships
    1. The limited partner exception: law and recent cases
    2. Planning implication
  4. Possible legislative changes

Benefits

The panel will cover these and other critical issues:

  • When should an LLC member's flow-through income be reported as self-employment income?
  • How can payments to partners be structured to mitigate self-employment tax?
  • When do the disadvantages of S corporation status outweigh the potential self-employment tax savings?
  • The impact of the tax court ruling in Soroban Capital Partners on taxation of limited partners' interests
  • How might future legislative changes affect planning for self-employment taxes for LLCs and S corporations?

Faculty

Pon, Larry
Larry Pon, CPA/PFS, CFP, EA, USTCP, AEP
CPA/PFS, CFP, EA, USTCP, AEP
Pon & Associates

Pon & Associates, a CPA firm,  has been proudly serving the San Francisco Bay Area since 1996. ...  |  Read More

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