Massachusetts Tax Alert®

March 17, 2009

M. Robinson & Company, PC

160 Federal Street, 6th Floor, Boston, MA 02110
Office: (617) 428-6900   Fax: (617) 428-0090

Solutions for Business and Tax ProblemsSM
 

Tax Traps Involving Limited Liability Companies

By Attorney Morris N. Robinson, LLM, CPA

March 13, 2009

 

The Conversion of an MBT into an LLC is Fraught with Tax Traps

 

Effective January 1, 2009 the Commonwealth of Massachusetts will treat many existing Massachusetts Business Trusts (MBTs) as S corporations. As a result, some Massachusetts MBTs are converting to Limited Liability Companies (LLCs) to avoid the Massachusetts entity-level tax on S corporations.  These conversions are fraught with significant tax traps for the unwary. The problem is compounded since the IRS announced several years ago that it is training its agents to audit LLCs competently.

 

Conversion of MBT into LLC is Deemed Liquidation of Corporation

 

The conversion of an MBT to an LLC may appear simple and straight forward. From a tax perspective, however, the conversion is typically treated as the liquidation of an existing corporation and the contribution of its assets to an LLC.

 

§         The liquidation of any corporation, including an S corporation, can result in the recognition of income at both the corporate level and the shareholder level. This occurs even if the converted MBT had only a single beneficiary.

 

§         The contribution of the assets of an MBT to an LLC can also trigger tax consequences unless the LLC is a "disregarded entity." FULL ARTICLE 

Topics In This Article Include:
 
  • Background: LLCs Are Often Subject to Partnership Tax Rules
  • Contributions of Encumbered Property to LLC
  • Changes in the LLC's Income Allocation Formula
  • Abandonment of an LLC Membership Interest
  • Negative Capital Accounts
  • Organizational Cost, Start-Up and Syndication Expenses
  • Section 179 Bonus Depreciation Pitfalls
  • Passive Loss Limitation Pitfalls
Attorney Advertising. This Tax Alert is a periodical publication of M. Robinson & Company, P.C. and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult an attorney concerning your own situation and any specific legal questions you may have. Any tax information contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding any federal tax penalties.