Tax Law (Questions About Taxes)/Investment and Employment in the same organization
I created LLC- A in 2012 to loan $$ to LLC-B that operates as a homebuilder. LLC-A also has a 10% ownership in LLC-B
I have no active involvement in LLC-B
Each year LLC-A receives;
1. A 1099 for the interest rate paid from LLC-B to LLC-A for the $xx loan
2. A K-1 for the 10% ownership LLC-A has in LLC-B
Both of these are considered passive and flow through to my personal taxes
My questions are:
1. How this will be treated if I become employed by LLC-B and begin receiving a W-2?
2. Will the loan and 10% ownership no longer be considered passive?
3. Will I be responsible for the FICA, Medicare taxes on the loan and K-1 amounts?
4. Will LLC-B be able to give me a 1009, K-1 and W-2?
I imagine you were hoping for a clear cut, absolute answer that you could just check off and expect it would never have to be addressed again.
But life is more complicated than that.
If the loan is properly documented then it will remain a loan. From your explanation it appears that it has a well documented history as a loan. That one is pretty clear.
The Ownership interest on the other hand can be subject to interpretation, and in fact, I think you are asking me this because you have gotten a few different answers to this question from some people that thought should actually know. I will tell you that each of the different answers could be right. The outcome can be influenced by the perception. Not only by you, but by your accountant, and IRS auditor, etc.
This is a grey area, For one: Owners can't be on salary in an LLC, 100% of what the LLC earns is attributed to the owners. An LLC doesn't have to attribute or distribute in relation to percentage ownership, (Which adds an entirely new layer of confusion that is outside the scope of your question so I don't want to confuse this further) on the other hand, if you have a contract between you and the LLC to perform a service for a fee, then that is a business expense and not part of the net income to the business and distributable.
There is no credible final determination that you can rely on. You can take a shot -- It may never be questioned, or if questioned, you might be able to argue your way through. so if some self proclaimed guru makes an absolute statement on one side or the other, it is because they don't know enough to realize there is no single response is absolutely correct, and either may be subject to interpretation.
What now exists is a lot of complications that may not be as efficient or effective as first thought. Are you familiar with Rube Goldberg? The Cartoonist that was famous for making elaborate machines to do simple tasks. Boots kicking bowling balls and candles burning through string. . .
I'm all for structuring a business transaction to best serve the players. But what you have may not be giving you all of the benefits you were hoping for.
AS you point out, the LLC-a just passes the 1099 and k-1 to you personally. That would have happened if you had done it personally.
Call me, because this question doesn't resolve a lot more "Core" issues. (702) 792-3392