Page 322 - TaxAdviser_2022

CASE STUDY
CASE STUDY

Payments to LLC members

for services

Editor: Other than guaranteed payments under not report income until the payments
Sheila Owen, CPA Sec. 707(c), when members receive are received.
payments for services performed for a In addition to the member’s tim-
limited liability company (LLC) that ing for income recognition, whether
is classified as a partnership for federal services are performed as a member or
income tax purposes, the first issue is as a third party affects the LLC. For
to determine whether the member is example, consider an LLC formed to
When LLC members performing the services in the capacity design and construct an office building.
receive payments for as a member or as a third party. When Assume one of the original members is
an architect who contributed $50,000
services are performed outside the
services performed member’s capacity as a member, the cash (10% of all contributed capital) for
for the LLC, the tax transaction is treated for tax purposes as a 10% interest in all LLC items. If this
member provides the necessary archi-
occurring between the LLC and a third
treatment depends party (Sec. 707(a)). Payments (other tectural services for the project in his
on whether the than guaranteed payments) received for capacity as a member and receives no
services performed in the member’s ca- payment (other than his allocable share
member is performing pacity as a member are generally treated of LLC income and cash flow), the
the services in as a distribution of the member’s share value of his services is not capitalized
the capacity as a of LLC income. to the cost of the building or deducted
by the LLC. If the same individual
When payments made to a member
member; services acting in the capacity as a member are had been paid a fee in addition to his
performed outside the treated as distributions of LLC income, distributive share of LLC profits (acted
the payment is a current distribution outside his capacity as a member) to
member’s capacity as under Sec. 731 (income is generally perform the architectural services, the
a member are treated recognized only to the extent the dis- LLC would be required to capital-
as occurring between tribution exceeds the member’s basis ize the fee paid as part of the cost of
the building.
in the LLC). However, the member
the LLC and a third reports the distributive share of income At times it is difficult to determine
party. (whether distributed or not) in its whether a member performing services
tax year that includes the LLC’s year for the LLC is acting as a member or a
end. This may result in the member’s nonmember. The intent of the parties
reporting income before payment is and the structure of the transaction gen-
received. The timing rule for recogniz- erally determine if a member is treated PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
This case study has been adapted from ing guaranteed payments is similar. as performing services as a nonmember.
Checkpoint Tax Planning and Advisory Alternatively, if payments are made to If a member performs the same type of
Guide’s Limited Liability Companies
topic. Published by Thomson Reuters, a member acting outside the capacity services the LLC renders, he or she is
Carrollton, Texas, 2022 (800-431-9025; as a member (i.e., treated as made to a often acting in his or her capacity as a
tax.thomsonreuters.com). third party), a cash-basis member does member. Additionally, he or she is most

42 June 2022 The Tax Adviser