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What to do now that I am K1 partner?

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  • SadlerMDInvestor
    replied
    Originally posted by jfoxcpacfp View Post

    spiritrider says it so much better than do I! tttt, we have zero clients with the setup you describe. I believe the K1 could be reported either on sch C with additional expenses added or on sch E with UPE. spiritrider may want to provide more info or a contrasting opion.

    Neither have I heard of the IRS frowning upon UPE. Expenses qualifying for UPE, as I mentioned above, should be laid out in the partnership agreement as the responsibility of the individual partners rather than the partnership. This concise article explains it. For practical purposes, I would guess most partnership agreements are not in compliance with this requirement and this may be why you got that comment. Not that difficult to amend the agreement with a simple statement, though.
    This forum is awesome, and I really appreciate the thoughtful replies! I will find a new CPA to chat with. It sounds like I may be getting some bad advice. URP sounds like the way to go. In practice, it is implied partners incur these expenses on their own, but amending the partnership agreement with the size of our practice could be a bit of a challenge

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  • jfoxcpacfp
    replied
    Originally posted by SadlerMDInvestor View Post

    Thanks for insight and taking the time for the reply! I may be completely misunderstanding why our practice does this (I hope not...). I was told the IRS frowned upon UPEs, which is why the other partners did the single member LLC. This way, each doc could have a separate LLC bank account and credit card they could use for their expenses that weren't paid at the partnership level or reimbursed. And instead of Dr. A getting a K1 from the practice, Dr. A, LLC would get a K1.

    I haven't been partner long enough to file my yearly taxes, but is this something that is possible? If Dr. A, LLC (not an S-Corp) receives the K1, does that K1 still get reported directly on Dr. A's schedule E as if Dr. A had received the K1 directly? And where would the expenses paid from Dr. A, LLC's bank account get reported on their tax return? This is all assuming the single member LLC is not an S-Corp and the only income it receives is from Dr. A's participation in the practice (and nothing else).

    I'm starting to think I got some pretty sloppy tax advice.
    spiritrider says it so much better than do I! tttt, we have zero clients with the setup you describe. I believe the K1 could be reported either on sch C with additional expenses added or on sch E with UPE. spiritrider may want to provide more info or a contrasting opion.

    Neither have I heard of the IRS frowning upon UPE. Expenses qualifying for UPE, as I mentioned above, should be laid out in the partnership agreement as the responsibility of the individual partners rather than the partnership. This concise article explains it. For practical purposes, I would guess most partnership agreements are not in compliance with this requirement and this may be why you got that comment. Not that difficult to amend the agreement with a simple statement, though.

    Leave a comment:


  • SadlerMDInvestor
    replied
    Originally posted by spiritrider View Post
    An LLC is a state chartered business entity. The IRS considers an LLC that has not elected to be an S-Corp a disregarded entity for tax purposes. A single member LLC is considered a sole proprietorship and a multimember LLC a partnership. They file as their respective IRS entity types.
    This is what I am worried about. This would mean that the K1 would still be reported on the doc's individual tax return as if the LLC didn't exist? Where would the expenses paid through the LLC go? It sounds like it would show up on schedule C as expenses but no income? That seems like it would raise some red flags. I think I need to find a new tax advisor...

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  • spiritrider
    replied
    An LLC is a state chartered business entity. The IRS considers an LLC that has not elected to be an S-Corp a disregarded entity for tax purposes. A single member LLC is considered a sole proprietorship and a multimember LLC a partnership. They file as their respective IRS entity types.

    Leave a comment:


  • CordMcNally
    replied
    Originally posted by SadlerMDInvestor View Post

    Thanks for insight and taking the time for the reply! I may be completely misunderstanding why our practice does this (I hope not...). I was told the IRS frowned upon UPEs, which is why the other partners did the single member LLC. This way, each doc could have a separate LLC bank account and credit card they could use for their expenses that weren't paid at the partnership level or reimbursed. And instead of Dr. A getting a K1 from the practice, Dr. A, LLC would get a K1.

    I haven't been partner long enough to file my yearly taxes, but is this something that is possible? If Dr. A, LLC (not an S-Corp) receives the K1, does that K1 still get reported directly on Dr. A's schedule E as if Dr. A had received the K1 directly? And where would the expenses paid from Dr. A, LLC's bank account get reported on their tax return? This is all assuming the single member LLC is not an S-Corp and the only income it receives is from Dr. A's participation in the practice (and nothing else).

    I'm starting to think I got some pretty sloppy tax advice.
    Single Member Limited Liability Companies | Internal Revenue Service (irs.gov)

    Leave a comment:


  • SadlerMDInvestor
    replied
    Originally posted by jfoxcpacfp View Post
    • First of all, if you are filing a schedule C, you are not incorporated.
    • Second, there is no purpose to your individual LLC, that I can determine, which leads to
    • Third, a business is able to deduct the same expenses whether you are set up as an s-corp, an LLC, or a sole proprietorship
    • Finally, all of the business expenses the partnership does not choose to reimburse are deductible as UPE (Unreimbursed Partnership Expenses) on pg 2 of sch E as long as the partnership agreement has the appropriate verbiage
    Hope that helps and welcome to the forum!
    Thanks for insight and taking the time for the reply! I may be completely misunderstanding why our practice does this (I hope not...). I was told the IRS frowned upon UPEs, which is why the other partners did the single member LLC. This way, each doc could have a separate LLC bank account and credit card they could use for their expenses that weren't paid at the partnership level or reimbursed. And instead of Dr. A getting a K1 from the practice, Dr. A, LLC would get a K1.

    I haven't been partner long enough to file my yearly taxes, but is this something that is possible? If Dr. A, LLC (not an S-Corp) receives the K1, does that K1 still get reported directly on Dr. A's schedule E as if Dr. A had received the K1 directly? And where would the expenses paid from Dr. A, LLC's bank account get reported on their tax return? This is all assuming the single member LLC is not an S-Corp and the only income it receives is from Dr. A's participation in the practice (and nothing else).

    I'm starting to think I got some pretty sloppy tax advice.

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by SadlerMDInvestor View Post

    This is interesting. My mixed-speciality practice is set up where the partners of the practice LLC (taxed as partnership) are their own individual LLCs. I have a simple pass through LLC. I recently became partner, but my understanding is that this allows us to take deductions for business expenses (nothing crazy) on a Schedule C that wouldn't otherwise be deductible if we were just K1 partners.

    For example, Doc A does a lot of travel to conferences, etc. for business, but the partnership doesn't want to reimburse that travel, so he can claim that as an expense on his schedule C. Doc B does a ton of driving to different facilities, but the partnership doesn't want to pay for part of his car or mileage, so he can write that off. Doc C needs a new computer because she does a lot of remote radiology work, so she can write that off through her LLC. Is that not a reason to incorporate if possible in a state where you don't have onerous fees/taxes like California?
    • First of all, if you are filing a schedule C, you are not incorporated.
    • Second, there is no purpose to your individual LLC, that I can determine, which leads to
    • Third, a business is able to deduct the same expenses whether you are set up as an s-corp, an LLC, or a sole proprietorship
    • Finally, all of the business expenses the partnership does not choose to reimburse are deductible as UPE (Unreimbursed Partnership Expenses) on pg 2 of sch E as long as the partnership agreement has the appropriate verbiage
    Hope that helps and welcome to the forum!

    Leave a comment:


  • SadlerMDInvestor
    replied
    Originally posted by jfoxcpacfp View Post
    Yes, this is the time to bite the bullet and hire a tax professional. Preferably a true “professional”. 100% agree with Cord that the S-corp w/b counterproductive at your income level (the LLC w/just be a nothing burger).
    This is interesting. My mixed-speciality practice is set up where the partners of the practice LLC (taxed as partnership) are their own individual LLCs. I have a simple pass through LLC. I recently became partner, but my understanding is that this allows us to take deductions for business expenses (nothing crazy) on a Schedule C that wouldn't otherwise be deductible if we were just K1 partners.

    For example, Doc A does a lot of travel to conferences, etc. for business, but the partnership doesn't want to reimburse that travel, so he can claim that as an expense on his schedule C. Doc B does a ton of driving to different facilities, but the partnership doesn't want to pay for part of his car or mileage, so he can write that off. Doc C needs a new computer because she does a lot of remote radiology work, so she can write that off through her LLC. Is that not a reason to incorporate if possible in a state where you don't have onerous fees/taxes like California?

    Leave a comment:


  • childay
    replied
    Originally posted by GorillaDO View Post

    I'm aware, but really have no choice in the matter, this was sprung on me a few days ago by our medical director, and very few shops hiring in the area at the moment so not much I can do about it in the short term.
    $220K sounded low for EM even before the paycut though right? Is this the norm in HCOL CA areas?
    Otherwise agree with above, no need for s-corp.

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by GorillaDO View Post

    I'm aware, but really have no choice in the matter, this was sprung on me a few days ago by our medical director, and very few shops hiring in the area at the moment so not much I can do about it in the short term.
    OT, but every time you post, I imagine you with a big bottle of Gorilla Glue on your desk...

    Leave a comment:


  • GorillaDO
    replied
    If you are being paid the same amount on K1 as you were as a W2 employee, I hope you realize that you are taking a huge pay cut!
    I'm aware, but really have no choice in the matter, this was sprung on me a few days ago by our medical director, and very few shops hiring in the area at the moment so not much I can do about it in the short term.

    Leave a comment:


  • jfoxcpacfp
    replied
    fwiw, some groups in CA require you to be an s-corp once you become partner, so you need to check on that. Otherwise, I agree you should avoid it.

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  • White.Beard.Doc
    replied
    If you are being paid the same amount on K1 as you were as a W2 employee, I hope you realize that you are taking a huge pay cut!

    Leave a comment:


  • jfoxcpacfp
    replied
    Yes, this is the time to bite the bullet and hire a tax professional. Preferably a true “professional”. 100% agree with Cord that the S-corp w/b counterproductive at your income level (the LLC w/just be a nothing burger).

    Leave a comment:


  • CordMcNally
    replied
    Originally posted by GorillaDO View Post
    So I had been doing all my own withholding and estimated taxes prior. No issues there, have been using quickbooks, working well. What is the reasoning as to why not to form S corp or LLC?
    Because it doesn't add any layers of protection (only adds work) in your situation and given the income you're expecting, the S Corp will likely cost you more money. Alternatively, why do you think you need an S Corp or LLC?

    Leave a comment:

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