Series LLCs and State Tax Implications

Transcription

1 FLORIDA INSTITUTE OF CPAS 2017 MEGA CPE CONFERENCE Series LLCs and State Tax Implications June 15, 2017 Presented by: Jeff Simpson Presented by: Jimmy Long Bradley Arant Boult Cummings LLP and Gordon, Fournaris & Mammarella, P.A.

2 What is a Series? Mind-Blowing Abstraction A quasi-separate entity Within a company A separate enterprise Segregated assets and liabilities From other series From LLC itself Discrete ownership 2

3 What is a Series? Evolution of Internal Segregation Separate account companies Segregated portfolio companies Protected cell companies Series LLC Largely Off Shore Innovation Mutual Funds Insurance 3 3

4 What is a Series? Quasi-Separate Features In its own name: Hold assets Contract Grant liens and security interests Sue and be sued 4 4

5 What is a Series? OWNER A SPONSOR 1 SPONSOR 2 OWNER C SERIES A SERIES C XYZ LLC SERIES B SERIES D OWNER B OWNER D 5

6 What is a Series? Easy Analogies Bucket Condo But not parent-sub 6

7 States Allowing Series 7

8 What is a Series? Created by contract (Not by State Action) General Requirements Enabling statute Public notice via certificate of formation Permitted by Operating Agreement Separate record keeping 8

9 Distinguished By: Members Managers LLC interests Assets What is a Series? A Series May Have Separate: Rights Powers Duties Business Purpose Investment Objective 9

10 What is a Series? Operating a Series 10

11 What is a Series? Benefits & Drawbacks 11

12 State Tax Considerations CTB Rules State conformity to federal treatment of pass-through entities (or not) What is a pass-through entity? Why do we care? 12

13 State conformity to federal treatment of pass-through entities (or not) Treas. Reg to -3 Starting point for any state tax discussion on passthrough entities (PTEs) Check-the-box (CTB) regulations (eff. 1997) US domestic unincorporated entity can elect its tax status for federal income tax purpose Defaults (domestic entities - automatic): Single member! Disregarded entity (DRE) Two members! Partnership 13

14 State conformity to federal treatment of pass-through entities (or not) States are sovereign; they can set their own rules But state legislatures quickly acted to conform 25 states conformed in 1997 Today, the vast majority of states conform But there are exceptions 14

15 State conformity to federal treatment of pass-through entities (or not) While conformity seems relatively straightforward It still leaves questions unanswered today How the states conformed Some states: DoR issued bulletins on conformity Legislatures enacted specific conformity statutes 15

16 State conformity to federal treatment of pass-through entities (or not) Some states Only addressed LLCs And forgot about other PTEs (i.e., partnerships(?)) Most say CTB only applies to income taxes DRE for income taxes, but NOT for net worth or sales taxes Minority say CTB applies to many (perhaps ALL?) taxes Missouri Alabama Wisconsin 16

17 State conformity to federal treatment of pass-through entities (or not) Interesting examples of non-conformity Colorado: Corporate income tax disregard single member LLC (SMLLC), and impose corporate income tax on nonresident member 17

18 State conformity to federal treatment of pass-through entities (or not) Interesting examples of non-conformity Louisiana Currently, Louisiana follows check-the-box for corporate income tax but not franchise tax purposes Effective January 1, 2017, for purposes of the Louisiana income and corporate franchise tax, LLCs are treated and taxed in the same manner as they are treated and taxed for federal income tax purposes 18

19 State conformity to federal treatment of pass-through entities (or not) Interesting examples of non-conformity Tennessee Follows CTB, BUT Only SMLLCs that are federal DREs AND have a corporation or a business trust as their sole member are disregarded for Tennessee excise tax purposes. Tax rates» Excise tax (net income) = 6.5%» Franchise tax (net worth)= 0.25% Department guidance indicates that SMLLC DRE status is respected ONLY if the sole member is a legal corporation (not a CTB LLC treated as a corporation for federal income tax purposes). 19

20 State conformity to federal treatment of pass-through entities (or not) Interesting examples of non-conformity Texas Franchise Tax on taxable margins (after 2008) Most pass-through entities are taxable Except :» General partnerships owned entirely by natural persons,» Certain passive investment partnerships» Special rule for REITs, and» Certain family limited partnerships. Combined Reporting Recent constitutional challenges (Allcat, Nestle) Recently enacted permanent $1 million exemption ( fourth measure of the tax enacted in 2013 (H.B. 500)) 20

21 State conformity to federal treatment of pass-through entities (or not) Interesting examples of non-conformity Nevada Effective July 1, 2015, Nevada enacted the Commerce Tax Prior to 2015, Nevada had no entity level taxes Applies to partnerships, limited liability companies, limited liability partnerships, and virtually all other incorporated entities Gross receipts tax based on receipts exceeding $4mm Rates varied based on business classification from. 051% to.331% 21

22 Series LLCs Tax Considerations Federal Tax Treatment Proposed CTB regulations issued in 2011 State Tax Treatment Only a handful of published rulings Informal guidance ABA / ASCPA Survey 22

23 Series LLCs State Tax Implications Published Rulings: California Each series treated as separate LLC subject to separate fee and tax. California law does not authorize series LLCs but it does recognize those formed under the laws of other states. Florida DoR will follow federal income tax treatment of each series in an LLC, unless treatment conflicts with Florida law (whatever that means!) Illinois New statute says series LLCs is treated as single entity or can elect to each be treated separately 23

24 Series LLCs State Tax Implications Published Rulings: Tennessee Letter ruling Separate franchise and excise tax returns required for each individual series rather than filing on single Tennessee return. Each series is treated as a separate entity for Tennessee franchise and excise tax purposes Series do not meet statutory requirement for being classified as DREs 24

25 Series LLCs State Tax Implications Published Rulings Texas Letter ruling A series LLC is considered a single taxpayer Series as a whole must file a single margin tax report. One series of the series LLC cannot file a margin tax report separate from the entire series LLC. The entity will also pay one filing fee and register as one entity with the Texas Secretary of State. 25