I’m about to become a partner in a physician practice, which I think is set up as a multi-member LLC. I was hoping to have the K-1 issued to my own single-member LLC instead of directly to me. An accountant told me this could help with deductions like car leases and allow me to file as an S-corp to lower payroll taxes.
The managing partner isn’t on board with this idea and says the LLC would need to sign the operating agreement, which he doesn’t want to happen. Am I right to push for this? Or is the accountant’s advice off?
This is more of a legal issue than a tax one. There are cases where having an S-corp as a partner can make sense, but it doesn’t sound like it applies here.
>I was told by an accountant that a lot of deductions, like car leases, can’t be taken unless the partnership issues them.
That’s not accurate. Creating an entity just to avoid taxes can get flagged by the IRS. They’re aware of these strategies and usually rule against taxpayers in such cases.
>Not having an LLC would prevent me from filing as an S-corp to lower payroll taxes.
This is also misleading. Even if an S-corp owns a partnership interest, the rules around self-employment taxes still apply. It doesn’t bypass them.
You’re probably better off keeping the ownership in your name. The legal protection of an LLC might not add much since you’d still be liable as a member of the operating LLC.
Monroe said: @Kit
I’ve been told by multiple CPAs that owning a partnership share through an S-corp can reduce self-employment taxes. Is this wrong?
It’s a common suggestion, but it might not hold up. The IRS could argue it’s just a way to avoid self-employment taxes without changing the nature of the income. Unless the entire income is treated as payroll, it might not pass the reasonable salary test.
You might be overestimating the benefits of an S-corp. If you want to save on taxes, you could look into a cash balance plan or participate in the partnership’s retirement plan instead of setting up an LLC and risking issues with back taxes or penalties.
There’s more to this than taxes. They might not want your LLC as a partner because it could complicate the ownership structure. For example, your LLC might allow others to indirectly hold a stake in the practice.
>My managing partner says the LLC would need to sign the operating agreement for the K-1 to be issued to the LLC.
Your partner is correct. For the K-1 to go to your LLC, the LLC needs to be the member of the partnership. While this is usually fine, medical practices often have stricter rules since they’re set up as professional LLCs, which can complicate things.
If your LLC isn’t part of the operating agreement, they aren’t required to issue the K-1 to it. You could pick up the K-1 as an individual and transfer the income to your LLC instead, then file it on your LLC’s tax return.