Tax Concerns Over Managment Fees
I recently started receiving a monthly managment fee for overseeing property in an LLC in which I am 50% member. Right now this fee is paid to me personally from the business account and logged as an expense to the LLC.
Is this the most efficient way to pay myself here?
I would not do that for asset protection reasons. Make yourself an employee of the company. That way as long as you are working under the scope of your job description, the company can be liable for anything.
If you pay yourself as a manager you need to report that on a Sch C. You should then get insurance, etc.
There is also the issue that (depending on your level of participation in the LLC) you are creating a passive oriented expense for the LLC but the mgmt fee income paid directly to you is not passive. On a closely related subject, there is something the IRS calls "self charged interest". THis is, for example, where you loan the LLC money generating interest expense for the LLC and income for you.
In the latter case, Congress grants you relief by allowing you to offset the passive expense by recharacterizing the interest income as passive.
However, they and case law are very clear that this only applies to "self charged interest" and not management fees (which was the basis for a landmark case on the subject- Hillman).
So, the problem is that you'll be somehwat unfairly disadvantaged in that the income and expense (though there is no net economic benefit) cannot offset each other. So, again depending on your participation status, you may not be able to take advantage of the passive LLC expense while at the same time paying tax on the income.
I may not have explained this well enough and there are quite a few little specifics that are need-to-knows regarding this so, go out and do some searchs on "self charged interest" and maybe include "management fee" and "Hillman" with the search.
Let us know what you find.
Anyone else have comments on this?
I'll try to post the following link so, I hope my status allows it to appear.
https://www.cpa2biz.com/ResourceCenters/Tax/SelfCharged+Interest+Offset+OK.htm