"cballard[at]tyyni.net" <cballard[at]tyyni.net> wrote:
- quote -

With the only partners being spouses I think IRS will not
view kindly changes each year that are just to save taxes.

---
Drew Edmundson, CPA
Cary, NC

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Drew Edmundson wrote:
- quote -

Excellent. I stand corrected.

In order to shift the allocations, they will still have to
meet the substantial economic effect rules in the
regulations, though. A special allocation that reduces the
overall tax burden of the partners is generally a big red
flag.

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Paul Thomas, CPA wrote:
- quote -

Minor correction here. An LLC does not use a partnership
agreeement, but an operating agreement which should of
course cover all pertinant items that a partnership
agreement might.

ChEar$,
Harlan Lunsford, EA n LA
Fri 17 Feb 2006 % hh

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"cballard[at]tyyni.net" <cballard[at]tyyni.net> wrote:
- quote -

I must respectfully disagree. Section 761(c) says:

"For purposes of this subchapter, a partnership agreement
includes any modifications of the partnership agreement made
prior to, or at, the time prescribed by law for the filing
of the partnership return for the taxable year (not
including extensions) which are agreed to by all the
partners, or which are adopted in such other manner as may
be provided by the partnership agreement."

So the agreement for 2005 can be amended up until the due
date for the return, not including extensions, which is
4-17-06.

---
Drew Edmundson, CPA
Cary, NC

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Linda wrote:

- quote -

Ah now, let me tackle this one!

Same case here with a client. "We" allocated 50/50 last
year for 2004. Husband is active part time and wife is
manager of he cafe (They even have a web site!)
anyway....... So this year business has picked up and I'm
proud of them for keeping their "eye on the prize" so to
speak. Good profits this year for such a small place.

So I suggested to Roger that he bring me a copy of the LLC
operating agreement for me to read with a view towards
amending it if necessary to allocated more of profits to her
(for social security account purposes AND to reflect her
greater percentage of time involved.

But the point is this. Follow the operating agreement
which every LLC must have. And if it is silent or specifies
otherwise, amend it, just like you would any formal
partnership agreement. (Yes, the amendment will be during
2005.) (grin)

ChEAr$,
Harlan Lunsford, EA n LA
Thu 16 Feb 2006 hh

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Linda wrote:

- quote -

They can change the allocation for future years if they meet
certain tests. Changing things after the fact for 2005 is
tax fraud.

Assuming that they would like to change things going
forward, the general rule is that they have to split profits
based on their economic interests in the LLC, which should
generally correspond to their respective capital accounts.
If they wish to have an allocation that differs from this
ratio, the allocation has to have "substantial economic
effect" as defined under the tax regulations for section
704. One of the key elements of having substantial economic
effect is that the allocation can not be made for the sole
reason that it would result in lower taxes.

If they really want to change the allocation, one of them
should contribute some extra capital to the LLC (or have the
LLC make extra distributions to one of them) in order to
make their capital accounts match the allocation they would
like to have going forward. It is way too late to be
planning for this for 2005.

--Chris Ballard

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"Linda" <linda_in_ND[at]hotmail.com> wrote

- quote -

The partnership agreement needs to address the division of
profits and losses. One can not just pick the best number
allocation. If the partnership agreement doesn't address
the division of earnings, then it falls strictly to the % of
ownership.

- quote -

No. Clearly % ownership changes, but so too, can the
division of profits and losses. Just get it down in the
agreement.

- quote -

Just get it in writing.

--
Paul Thomas, CPA
paulthomascpapc[at]bellsouth.net

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"Linda" <linda_in_ND[at]hotmail.com> wrote:

- quote -

Yes, the IRS cares. I've seen them go after people who
didn't allocate income and deductions in what they consider
a "rational" way.

If there is a rational basis for the allocation - e.g. one
worked more hours or made an additional capital
contribution, then it can work. Otherwise it might be
considered a distortion of income, which the IRS doesn't
like one little bit.

Stu

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Linda" <linda_in_ND[at]hotmail.com> wrote:

- quote -

The answer lies in Regulation 1.704-1. I would cite to the
actual page but you really need to read and understand the
whole thing. But to answer your questions:

No you are not locked in by the first return.
Yes you have to follow the LLC agreement but it can be
amended each year.

No change the allocations and have the change respected for
income tax purposes you have to amend the LLC agreement and
follow the rules of 1.704-1.

---
Drew Edmundson, CPA
Cary, NC

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I hope this isn't a duplicate. Husband and Wife formed a LLC
in 2004, report on form 1065. 2004 net profits were
allocated 50% to each. For 2005, it would be advantageous to
split the net profit differently. Can this be done? Are the
allocations locked in when the LLC is set up or by the 1st
return? Both spouses spend about the same amount of time at
the business. Does IRS care if it is 50-50 one year and
70-30 another year?

Thanks,
Linda

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