| A limited liability company ("LLC") shall not be subject | | | | there are a number of other items of LLC income and |
| to federal income tax. Persons carrying on their | | | | deduction that may affect each member differently |
| business as members shall be liable for income tax | | | | depending on the member's tax profile. For example, |
| only in their separate or individual capacities. | | | | consider ABC, LLC whose only tax item is for the |
| Computing the LLC's amount of profits or losses is | | | | year is a $10,000 capital gain, which is allocated equally |
| important in determining how much profits or losses | | | | between its two members, Steve and Jane. If Steve |
| should flow through to the members, thus, it is | | | | has no other capital gains or losses for the year, and |
| extremely important that every LLC have an LLC | | | | Jane has a $2,000 capital loss for the year, the tax |
| Operating Agreement. Once the LLC's amount of | | | | effect of the $5,000 LLC capital gain allocated to each |
| profits or losses has been determined, the profits or | | | | member would be different. Steve would report a |
| losses can then be allocated proportionally to the | | | | $5,000 net capital gain, while Jane would report a |
| members according to the allocation determined by | | | | $3,000 net capital gain. If the LLC gain was expressed |
| the LLC's Operating Agreement. | | | | simply as net $4,000 income for the year, without |
| In general, LLC taxable income is computed in the | | | | specifying its character as capital, the members would |
| same manner as an individual's taxable income with | | | | not have the information necessary to adequately |
| certain modifications. The most important modification | | | | report their income for the year. Thus, the LLC |
| is that items described in Internal Revenue Code | | | | information return must separately state this capital |
| Section 702(a) are separately stated. The reason for | | | | gain, as well as other items that can affect the |
| separately stating these items is that they have special | | | | members in different manners. The Internal Revenue |
| significance to individual members. Internal Revenue | | | | Code specifically lists these items in Internal Revenue |
| Code Section 703(a) also denies two types of | | | | Code Section 702(a)(1)-(6): |
| deductions that individuals are normally permitted. The | | | | · Short term capital gains and losses |
| first type of deductions are those that are considered | | | | · Long term capital gains and losses |
| inappropriate for LLCs, such as the deduction for | | | | · Gains and losses from the sale, exchanges, |
| personal exemptions and the itemized deductions. The | | | | or involuntary conversions or property used by the |
| second type are those deductions which the benefits | | | | LLC in its trade or business |
| are passed through to the members in their individual | | | | · Charitable contributions |
| capacities, such as certain foreign taxes, charitable | | | | · Corporate dividends and qualified dividends |
| contributions, net operating losses, and depletion and of | | | | · Foreign taxes |
| oil and gas wells. | | | | · Other items of income, gain, loss, deduction, or |
| Separately stated items | | | | credit as required under the Internal Revenue Code |
| The taxation of LLCs is based on a blend of entity and | | | | Disclaimer: The information provided herein is not legal |
| aggregate notions of partnership taxation. There are | | | | advice, but a general overview and should not be |
| some items that will affect all members the same | | | | construed as legal advice. |
| way, without regard to the members' tax profits. But | | | | |