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Summary 7-1 Activity: Client Letter TAX 655 Federal Income Tax of Corporations Southern New Ha
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7-1 Activity: Client Letter TAX 655 Federal Income Tax of Corporations Southern New Hampshire University 1 08:35:57 GMT -05:00 Juwan Smith and his 3 friends created Smith & Associates LLP, a limited liability part- nership where the income will be generated by representing those involved in b...

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  • October 19, 2024
  • 5
  • 2024/2025
  • Summary

Subjects

  • under sec
  • 7 1 activity client letter tax 655 federal inc
  • a limited liability part nership where the incom
  • and will be split equally among them the interna
  • âsec 1402a13 provides that a guaranteed pa

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7-1 Activity: Client Letter

TAX 655 Federal Income Tax of Corporations

Southern New Hampshire University




1




08:35:57 GMT -05:00

, Juwan Smith and his 3 friends created Smith & Associates LLP, a limited liability part-

nership where the income will be generated by representing those involved in bankruptcy and

foreclosures, and will be split equally among them. The Internal Revenue Service (IRS) started

taking legal action to clarify the application of self-employment tax laws to Limited Liability

Company (LLC). What I found is, “Sec. 1402(a)(13) provides that a guaranteed payment, under

Sec. 707(c), to an LLC member for services rendered is subject to self-employment tax. A signif-

icant number of taxpayers have claimed that none of the residual profits after deducting guaran-

teed payments, or so-called distributive earnings, are subject to self-employment tax even if

those earnings were allocated to a managing or otherwise actively working member. To be fair,

some taxpayers have taken a more conservative view by applying proposed regulations and lim-

ited case law to subject some or all of their distributive share to self-employment income tax”

(Lewis, 2018). This law allows for distributive earnings to be allocated to the limited partner and

be excluded for self employment tax. Limited partners can exclude their distributive share for

self employment tax. General partnership would be subject to self employment tax on their dis-

tributive shares. The LLC member can have limited liability and still be an active manager in the

LLC because when LLC’s are developed, the state you’re in, it’s statutes clash with that of fed-

eral tax law.

These partners at Smith & Associates LLP are offering a service to represent those in-

volved with bankruptcy and foreclosures and any payments are made to the company, not an in-

dividual. The way their company is structured and how payment is received, the partners

wouldn’t appear to qualify as self employed income. If it was a self employed tax, it would be

2




08:35:57 GMT -05:00

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