My client is a 2 members LLC with 80% and 20%. The 80% member(A) wants to transfer 40% to the 20% member (B) so A will have 40% and B will have 60%. Is the transfer a taxable event to A?
RE: transfer of LLC interest -
10/16/09
at 3:47 PM
Yes, and the taxable results will depend on the liabilities of the LLC. Unless it's a gift in which case there are other rules. Whenever you see the word "transfer" it means the transaction isn't well-defined yet. What is motivating A to hand off [see how much better "transfer" is than "hand off"?] half of his interest in the LLC?
RE: transfer of LLC interest -
10/16/09
at 10:25 PM
As far as I know, the percentage is only on paper. A thinks he paid too much taxes in 2007 when he received his K-1 for 80% of the profit. So in 2008, he does not want to have 80%, he rather wants to have 40%. Can he just hand off half of his interest to the other member without incurring a taxable event? The LLC does not have any liabilities except the loans from members.
RE: transfer of LLC interest -
10/17/09
at 5:19 PM
Why doesn't he pay B a guaranteed payment instead of gifting him 40% of the business? That would reduce the taxable income passed through on the K-1 to A, but could be rethought next year if he doesn't think B earned his 60% any more.
First of all, you state that your client is the LLC but then ask advice about an individual partner. Be very aware of the potential conflict of interest.
Let's say A is in the 35% tax bracket so he takes home 65%. Would he rather keep 65% of a 4/10 share or twice that much?
Of course he might drop to a lower bracket or have other factors like AMT and phaseouts, but tax is always less than the income. So A might have very good reasons for cutting back his share, but high taxes is not one of those reasons. Something else is going on.
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