I have a new multi partner LLC - less than a year - and the tax man is upon us.
After spending a 1/2 day on google, I'm still not finding a clear "yes/no", or even a "maybe" explanation. So hopefully this forum....
The LLC is a real estate LLC. Yes, we're still alive out here. Even ownership split between the partners with 50-50 ownership. One partner is the business expert/sweat equity partner and works 40+ per week. One partner is the financial high net worth partner, can get the bank financing, but does no daily work for the LLC. Track the expenses as you go. Even split of the profits at the end.
The questions comes up about accounting for the sweat equity partner.
Since he is working 40+ hours per week,
(a) is he considered a full time employee of the LLC as well as a partner?
I know we can wave our hands at the issue, and say he's replacing a full time employee expert we would have to hire to run the business, but damn if I can find any IRS document that says that clearly.
I've heard that not providing a reasonable salary for a active partner engaged in the day to day business will raise an audit flag with the IRS. The IRS doesn't believe business partners work for zero/free.
(b) I know legally things are flexible on LLCs, but I'm finding it damn difficult to find any straight forward regulations from the IRS on defining a full time employee and the requirements to pay them a salary.
What I'm looking for is "IRS says no one works for free. 40 hours plus is an employee. You have to pay him. Pay him a reasonable salary based on industry comps." The sweat equity partner has savings to survive right now, so he's even flexible to taking a deferred salary.
I'm trying to make the "expenses" we track clear now. I know we should have made it clear a few months ago when starting, but letting it go further will just make a massive mess. I'm also having to educate our accountants on recognizing a deferred salary expense as a ligitimate expense they have to track.
Many thanks.
After spending a 1/2 day on google, I'm still not finding a clear "yes/no", or even a "maybe" explanation. So hopefully this forum....
The LLC is a real estate LLC. Yes, we're still alive out here. Even ownership split between the partners with 50-50 ownership. One partner is the business expert/sweat equity partner and works 40+ per week. One partner is the financial high net worth partner, can get the bank financing, but does no daily work for the LLC. Track the expenses as you go. Even split of the profits at the end.
The questions comes up about accounting for the sweat equity partner.
Since he is working 40+ hours per week,
(a) is he considered a full time employee of the LLC as well as a partner?
I know we can wave our hands at the issue, and say he's replacing a full time employee expert we would have to hire to run the business, but damn if I can find any IRS document that says that clearly.
I've heard that not providing a reasonable salary for a active partner engaged in the day to day business will raise an audit flag with the IRS. The IRS doesn't believe business partners work for zero/free.
(b) I know legally things are flexible on LLCs, but I'm finding it damn difficult to find any straight forward regulations from the IRS on defining a full time employee and the requirements to pay them a salary.
What I'm looking for is "IRS says no one works for free. 40 hours plus is an employee. You have to pay him. Pay him a reasonable salary based on industry comps." The sweat equity partner has savings to survive right now, so he's even flexible to taking a deferred salary.
I'm trying to make the "expenses" we track clear now. I know we should have made it clear a few months ago when starting, but letting it go further will just make a massive mess. I'm also having to educate our accountants on recognizing a deferred salary expense as a ligitimate expense they have to track.
Many thanks.