¶ 4601
Overview
Scope of the chapter. The preceding chapters of this Part treat the federal income taxation of an LLC and its members. This chapter completes the Part with two subjects that sit at its edges. The first is state and local taxation: how the states classify LLCs, which states tax LLCs at the entity level whatever their federal classification, when a state may tax a nonresident member or an out-of-state LLC, how states collect tax from nonresident members, the elective pass-through entity taxes that most states enacted after the federal limitation on the deduction for state and local taxes, and the state treatment of sales of interests and of single-member LLCs. The second is the federal regime for members who are not United States persons: the rule that a foreign member is engaged in a trade or business in the United States whenever the LLC is, the withholding tax that an LLC classified as a partnership must pay on effectively connected income allocable to its foreign members, withholding on fixed or determinable annual or periodical income, the rules for real property interests, treaty access through fiscally transparent entities, the portfolio interest exemption, the branch profits tax and the chapter 4 rules enacted by the Foreign Account Tax Compliance Act. The chapter closes with the structures in which foreign persons use domestic LLCs and United States persons use foreign LLCs, the operating agreement provisions that the rules require, and a checklist.
Why these rules belong in an LLC treatise. Each rule in this chapter imposes an obligation on the LLC itself, or on its manager, that arises from the identity or residence of a member. A California LLC with a single member who moves to Texas changes the LLC's state withholding obligations. A Delaware LLC that admits a German investor becomes a withholding agent with quarterly payment obligations to the Internal Revenue Service, whether or not it distributes any cash. An LLC that elects into a state pass-through entity tax pays a tax that benefits some members and not others. The operating agreement must say who decides these matters, how the cost is borne, what information members must supply and what happens when a member fails to supply it. Those are questions of LLC law, and the agreement is the place to answer them.
Relationship to other chapters. Entity classification is treated in Chapter 39, the disregarded entity in Chapter 42 (including the Form 5472 regime for foreign-owned single-member LLCs), the transfer of interests and withholding under section 1446(f) in Chapter 41, the S corporation election in Chapter 43 and the centralized partnership audit regime, including state conformity to it, in Chapter 44. Beneficial-ownership reporting is treated in Chapter 48 and non-U.S. LLC statutes in Chapter 54. The state franchise and annual taxes that are conditions of good standing are introduced in Chapter 6 (formation and annual maintenance). This chapter cross-refers to those treatments and does not repeat them.
A note on figures. The dollar thresholds and rates in this chapter change often, and many are indexed for inflation. Each figure stated is taken from the statute or the taxing authority's publication cited with it, as of the date of this edition. The practitioner should confirm the figure for the year in question before relying on it.