on profit of LLC shares
I own 15 percent of a limited liability company,
LLC, established in New Jersey three years ago. I had an original
investment of $165,000. I will be selling my shares for $275,000.
What is my tax rate on the $110,000 profit? -- Paul
Your tax rate depends on how the LLC is treated
for tax purposes. An LLC is usually classified as a partnership,
unless it elects to be treated as a corporation for tax purposes.
If you made the corporate election, then you'll be treated as selling
shares in a corporation. The sale of corporate stock held for more
than a year is treated as a long-term capital gain, taxed at 15
percent. So your tax would be $16,500, and you don't have to read
If the LLC is treated as a partnership, this means
you should get annual Schedule
K-1 forms. Your original $165,000 investment would be increased
for income that you paid tax on when you reported it on your individual
return and decreased by any losses allocated to you and any distributions
of cash or property you received. Your investment and adjustments
are reflected in your capital account (see Box N of Schedule K-1).
These allocations would change your gain so that it may be more
or less than $110,000.
After analyzing your capital account, assuming again
that the LLC is a partnership for tax purposes, you have to look
at the underlying assets that make up your investment in the LLC.
If there are any tainted assets, you may have to recognize ordinary
income on part or all of your gain.
Tainted assets are assets that, if sold or collected
by the partnership, would produce ordinary income. For example,
if the partnership used the cash basis of accounting for its receivables,
these would be ordinary income to the partnership when collected.
Since when you sell your shares you're receiving money for these
assets, it's only right that you should recognize ordinary income
on your proportionate share.
Ordinary income, as opposed to capital gain, is subject
to tax at the same rate that applies to your other income such as
salaries and other business income. The maximum tax rate applied
to ordinary income is 35 percent, plus any state tax that you may
owe. The partnership should make these calculations for you and
advise you of any tainted assets.