United States: Single Member LLC Is A Separate Trade Or Business Under Section 446, IRS Advises

In an internal legal memorandum (ILM 201430013) released July 25, the IRS Office of Chief Counsel advised that a company and its single member limited liability company (SMLLC) are separate trades or businesses within the meaning of Section 446(d). The chief counsel's office said its conclusion was based on available information it was provided.

Under Section 446(d), a taxpayer engaging in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business (as long as the method clearly reflects income). Treas. Reg. Sec. 1.446-1(d) says that separate trades or businesses must be "separate and distinct," and have a complete and separable set of books and records. Even if a taxpayer maintains separate books and records, however, the taxpayer isn't considered to have separate and distinct trades or businesses if profits and losses between the two trades or businesses are created or shifted because of having different methods of accounting.

Courts have considered the following additional factors regarding whether a taxpayer is engaged in separate trades or businesses: (1) whether common management exists, (2) whether the taxpayer holds out each line as a separate business, (3) whether separate bank accounts are used, (4) whether the businesses share employees, and (5) what the nature of each business is. However, case law has generally treated the last factor as the most important (i.e., how similar or integrated are the businesses).

Under the facts of the ILM, the SMLLC had previously been a subsidiary of the company but had converted to an LLC without electing to be taxed as a corporation. So, the SMLLC isn't regarded as an entity separate from the company for federal tax purposes.

Determining whether the SMLLC is a separate trade or business from the company is based on the taxpayer's facts and circumstances. In the ILM, the IRS looked at various factors indicating that the company and the SMLLC were separate and distinct trades or businesses, including the fact that the company and the SMLLC engaged in different activities. The SMLLC was a manufacturer that sold products to a third party. The company was primarily engaged in sales, marketing, distribution, sales support, R&D, and administrative and headquarters functions. Additionally, the company and the SMLLC had separate books and records, were in different geographical locations and didn't share employees (other than high-level executives).

The IRS noted that just because the SMLLC had failed to elect to be treated as a corporation and as such was disregarded as an entity separate from the company for federal tax purposes didn't mean that the SMLLC could never be a separate and distinct trade or business under Section 446.

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