How the IRS Taxes Series LLCs

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The IRS has issued proposed Treasury Regulations on the Series LLC. Treasury Regs are the guidelines that CPAs and attorneys use to develop specific tax strategies. They also tell us how to properly report on tax returns. Congress might tell us what to do. The Treasury Regulations tell us HOW to do it.

Series LLCs have come into more common use and that means that the IRS needs to help us know what to do with them.

If you have a question on what a Series LLC is, or how it can help you, please take a look at the last few days of blogs.

The proposed Treasury Regulations don’t have a lot of surprises. They state that each cell (only they call them series) under the main Series LLC can elect how it wants to be taxed. It can have different members and manager and different business purpose. It MUST have a different accounting system, records and bank account. Otherwise, the separate asset protection won’t work.

One difference, though, is that it appears that we will not be able to easily roll up the individual series (cells) into the main LLC. This was a strategy that we’ve used for real estate investors with multiple properties. We could hold each property in an individual series and then ‘roll’ them together for one tax return.

Now it looks like we’re going to have to consider each cell a separate entity. Normally that would mean a separate tax return. But that means extra cost and hassle.

So, the new Series LLC multi-series solution for real estate (now that’s a mouthful) will be to have each single member LLC that holds real estate owned by the parent. So the single member LLC will be considered a ‘disregarded entity’ and thus get to report on the one bigger return anyway.

Sound complicated? It’s not really, but you do need to make sure you’ve got the ownership right and you do the right reporting.

Oh, and if you’re worried that you’ve done it wrong in the past, there is a grandfather provision in here so that the new rule will be effective only after 9/14/10. Older stuff gets to be the way it is.

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