Tax return for a partnership LLC with no business activity

24 Replies

If a partnership has no items of income, deduction, or credit for the tax year, no federal income tax return is required.  There may still be an obligation at the state and local level.

I highly recommend you work with a professional here if you have the slightest bit of doubt.  Penalties and interest are not fun.

Originally posted by @Alejandra Tapia :

@Steven Hamilton II

Thank you, Steven! Would you happen to know of an experienced CPA that could work with me? I am in the Long Beach/Lakewood area in California.

Thanks in advance!

 To be honest: You definitely need to focus on someone qualified, does not have to be a CPA, could be an Enrolled Agent or an attorney. Just make sure they specialize in tax and have significant experience dealing with real estate investors.
Here is a great list of questions to ask a potential accountant:http://www.biggerpockets.com/f...
Also check out the www.NAEA.org page in your search. It should help you find someone local. If someone comes to me, I'll send them your way.
If you need help in your search or want to verify something don't hesitate to ask.
For example: I have clients worldwide and things are just as easy as I e-mail them, talking on the phone. I even use Skype and TeamViewer to communicate with clients so I'd highly recommend looking for one of the best with great references that interviews well with you.
So look for someone you can connect with that works out for your situation more so than someone located in close proximity.
Feel free to ask here if you have questions

Originally posted by @Manolo D. :

@Alejandra Tapia I think @Logan Allec is local and an investor himself. If memory serves right and I'm not a professional when it comes to this but only a knowledge since I have a business, if your LLC is active in CA, you still have to pay that $800/year to EDD/CA - activity or not.

Logan Allec is no longer in the tax business, unfortunately. Fortunately, there're many other outstanding tax pros who you can find here, including the 3 of my colleagues who replied earlier.

 

I would file even if there is no activity.  Prevents potential IRS questions later on about your true business start date. 

@Greg O'Brien

In practice, what you're describing is not a risk.  No one at the Service is going to question this.  It's codified and explicit.

As professionals, our duty is to save our clients money.  I wouldn't advise filing a return that I would otherwise charge for if there is no filing obligation to begin with.

@Eamonn McElroy I am in practice and you are incorrect. Codified in the Code?  No, it is silent on this.  However, it is addressed in regs and in FAQs.  In fact, for a partnership, filing is NOT required if there are no sources of income, deductions or credits.  Yes, it says if there are deductions, you should be filing.  This is "explicit".  For an S or C, this is a completely separate analysis.

Given that every LLC has a state fee, there would be an item of deduction. Second, what about basis? If a partner contributes $1, there basis has changed, although it is not a taxable event. Would you recommend not filing if there were only contributions and then amending later to correct prior year basis? You cannot change beginning basis the following year.

Third, if there is even an annual report fee, you and choose not to file, the partners' basis are now incorrect with the IRS.  Lastly, you are giving broad guidance that states do not follow.  In CA, this is not the case since I do business here.  The FTB says a partnership must file if they are "engaged in a trade or business".  Making a broad statement not to file is dangerous for these reasons.  The FTB is tougher than the IRS.

Now if your advisor is charging you for a no activity or limited activity filing, yes, you are getting hosed.  Most likely means you are in a transactional relationship or using a CPA that uses an outdated hourly billing model. 

Greg...I'm not even sure where to start really.

We're in agreement on potential decoupling as far as state and local filing obligations go.  You'll notice I mentioned that dynamic one month ago in post #2 of this thread.  Thank you for restating it.

I was specifically addressing this language from you: I would file even if there is no activity. Prevents potential IRS questions later on about your true business start date. [Empahsis Added]

"Given that every LLC has a state fee, there would be an item of deduction."

You're off base here. They would be capitalized as start up expenses and not allowable as deductions until the trade/business or income producing activity begins. There are limited exceptions to IRC Sec 195. State LLC fees are not one.

"Second, what about basis? If a partner contributes $1, there basis has changed, although it is not a taxable event. Would you recommend not filing if there were only contributions and then amending later to correct prior year basis? You cannot change beginning basis the following year. Third, if there is even an annual report fee, you and choose not to file, the partners' basis are now incorrect with the IRS."

If there is no state/local filing obligation, I absolutely would advise the client that tax return filings are not required for the tax year.  The bookkeeping is still done and a balance sheet and capital accounts are still maintained.  Filing is not required to establish or maintain basis.  I'm unsure of what you mean by "changing" basis the next year.  The beginning basis is merely reported when a filing obligation is triggered.  How can we be "changing" the basis if basis was never reported to begin with (as a filing obligation didn't exist).  Again, this is not an issue.

"Now if your advisor is charging you for a no activity or limited activity filing, yes, you are getting hosed. Most likely means you are in a transactional relationship or using a CPA that uses an outdated hourly billing model."

Thank you for the insinuation Greg.  I don't know what billing model you use, nor you I, but I can only assume that additional work on your end equals higher fees for your clients, as that is pretty universal in business.  If the work doesn't need to be done, I advise clients as such, and they are happy to not file.  Best of luck.

@Eamonn McElroy I simply responded with my opinion to the initial question that I think they should file.  Not sure why you felt it necessary to shoot back at my response about what Service agents think.  It is my professional opinion and based on both what the regs say and experience.

The facts did not state an initial return, so this wasn't even considered. You may deduct up to $5k in startup and organization expenses (LLC fees) in the year operations begin. Yes, the remainder up to $50k get capitalized and amortized.

In practice we have seen basis schedules challenged.  How can the IRS rely on a random opening balance on a basis schedule that does not track back to the prior year?  Why not just take the hour to create the record.  Seems like a small bit of work to create an accurate file. 

Lastly, no, we would not charge clients for a filing with such limited items or activity on it. We develop relationships and are happy to spend an hour to get things right, knowing they will be a client for a very long time.  We don't think taking a risk that could lead to a letter, which requires response time, is worth it when you can spend an hour proactively to 100% avoid that. No need to bill for such a simple task, in my opinion. 


Greg, that's great you seek to build relationships to encourage longevity among clients, all practitioners do.

I've been practicing for a while too, and respectfully, the points you're raising are "much ado about nothing".  You're suggesting both the firm and the client engage in low-value and unnecessary work because of the specter of "maybe the IRS might have questions".  That's why I responded, to address what I perceived as innocuous fearmongering.  

IF the client gets a notice regarding not filing a partnership return for the initial year(s) in which an obligation did not exist, which they almost certainly won't, it takes much less time to draft and mail a response letter to explain the situation than to prepare the unnecessary return(s).  It just makes the most objective sense for both the firm and the client to not file if there is clearly no filing obligation.  It doesn't add value to the client.  And if it doesn't add value to the client, and doesn't need to be done, the question "then why are you doing it" becomes glaring.

If the IRS has a question about basis, they're going to ask for the capital account schedules and balance sheet, not the tax returns.  The tax returns are reflective of the source docs.

I think you made a typo, or you're off base on your understanding of start up costs.  Up to $5k are deductible in which the trade/business begins.  The remainder (not just up to $50k) is capitalized and amortized.  If total startup costs are over $50k, the deductible amount phases out dollar for dollar.

You seem to be having difficultly conceptualizing how one explains to the IRS a non-zero beginning tax capital account on the first return filed or a beginning tax capital account on the return that doesn't match the most recently filed return with an interim period of no filing obligations between the two.  I assure you it's not as difficult as you're making it out to be.  But...if the concerns you have are bonafide perhaps your practice is better off taking the more time intensive path of filing returns where no obligation exists and avoiding any chance of confrontation (however miniscule) with the IRS.

@Eamonn McElroy let's get a few things straight here.  Do not throw out insults or accuse someone of having "difficulty conceptualizing" or "fear-mongering".  You'd be amazed how your tone and statement comes comes across on these forums.  It speaks volumes.  That is disrespectful and not in line with the spirit of these forums. 

I do not have time nor interest, to get into a back and forth with you.  We have different opinions and guess what, that is OK!!  I am happy and enjoy friendly tax policy, tax law or nitty gritty regulation debates, but when you make those type of statements, cya later.

You do not need to accuse me, nor anyone else of "fear-mongering" nor questioning tax logic.  Those disrespectful statements really ruin forums. Yes, I understand the 195 rules, but it is not necessary to explain every detail on a public forum.   


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