Self-Employment Tax and NIIT for LLCs and Higher Income Individuals: Navigating the Complex Interplay

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


Conducted on Tuesday, December 13, 2016

Recorded event now available

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Program Materials

This webinar will prepare CPAs and tax attorneys specializing in federal income taxes to structure and implement tax reduction strategies for self-employment tax and federal net investment income tax (NIIT) under IRS regulations. The webinar will also provide an update for recent developments, including the impact of Temp. Treas. Reg. Section 301.7701-2T on SET planning with LLCs and predictions on the impact arising from presidential candidate proposed tax reforms.

Description

The complex interplay between the NIIT and the self-employment tax can be vexing for accounting advisers, federal income tax professionals and tax counsel. The NIIT, also known as the 3.8% Medicare tax, applies to the passive investment income of individuals in upper income brackets and is generally viewed as an alternative to self-employment tax. However, uncertainty regarding self-employment income of LLC members and limited partners continues to create confusion.

This area of the Code offers unique planning opportunities because the IRS has failed to clarify what a limited partner is for all purposes, raising questions about applying the self-employment tax to limited partner income. Multi-entity companies can restructure activities to fully or partially avoid both self-employment and the NIIT. Doing so requires a precise understanding of the current rules and knowledge of the various traps.

Among other opportunities and concerns, taxpayers that materially participate in a trade or business can often escape the NIIT. Activity grouping can also mitigate the NIIT, but any unintended decrease in passive activity losses could jeopardize the tax savings.

Listen as our panel of federal tax experts outlines proactive planning strategies for minimizing 3.8% tax and self-employment tax liability. You will have a clearer understanding of the applicable tax law, guidance and relevant court decisions, and be able to navigate the murkier areas still open to interpretation.

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Outline

  1. Introduction
    1. Pre & Post 2013 Supplemental Taxes
    2. FICA and SET Basics
    3. NIIT Basics
  2. Self-employment tax implications for LLC members
    1. The limited partner exception
    2. 1997 proposed regulations
    3. Case law and rulings
    4. Where are we now?
  3. Treatment of limited partners under 3.8% taxes, including NIIT
    1. Rental real estate activities—real estate professionals
    2. The “Limited Partner” Problem
    3. Trusts and estates
  4. Planning opportunities
    1. S corporations
    2. Use of LLC and LPs
    3. Effect of grouping activities
    4. Self-charged interest and rent
    5. Avoiding NIIT through “material participation” and “significant participation”
    6. Net gain from dispositions
    7. Other business entity strategies
  5. Proposals and changes on the horizon
    1. Legislation limiting SET/NIIT exemption
    2. Latest Tax Reform Proposals
    3. Regulatory Proposals

Benefits

The panel will review these and other important issues:

  • Interpreting the gaps in IRS regs using recent case law to confirm whether self-employment tax applies to limited partners
  • Grouping activities among entities and partners to meet the 500-hour material participation test
  • Ensuring that trust income is distributed to minimize the NIIT impact
  • Determining whether an S corporation blocker arrangement could benefit taxpayers
  • Understanding how proposals by the IRS, Congress and the Obama Administration to modify 3.8% tax rules could affect future compliance and the likelihood of enactment

Faculty

Browne, James
James R. Browne

Partner
Barnes & Thornburg

Mr. Browne has more than 30 years of experience in matters involving federal, state, and foreign taxes. He advises...  |  Read More

Hess, Cameron
Cameron Hess

Partner
Wagner Kirkman Blaine Klomparens & Youmans

Mr. Hess practices in the firm’s Transaction Department in the areas of taxation and business law. A CPA,...  |  Read More

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