Tax Administration Policy - Limited Liability Company (LLC) and Limited Liability Partnership (LLP) Owners Compensation Deduction
City of Portland Business License Tax Law and Multnomah County Business Income Tax Law provides for different owners compensation deductions for general partners or LLC members and limited partners and LLC members deemed to be limited partners. The Revenue Division ("Division") has reviewed both the historical intent of defining a different deduction for general and limited partners and Temporary IRS Regulation Section 1.469-5T (e)(3). Based on this review, the Division believes that those partners and LLC members who are involved in the day to day business activity of the partnership or LLC should be treated as general partners.
The Division will consider all LLC members and LLP partners who receive partnership or LLC income taxable as self-employment income as defined in IRC Section 1402(b) to be general partners or members for calculating the owner’s compensation deduction.
In cases where the activity of an LLC or LLP does not require the income of the activity to be designated as self employment income (such as rental activity), the Division will deem the LLC members or LLP partners to be general partners for purposes of the compensation deduction if all three of the following facts are true:
- The member or limited liability partner is granted “control” which is equivalent to a general partner. Such control is defined as control over the day to day activities of the partnership or LLC that would be equivalent to a general partner. For an LLC member to be deemed a general partner who is granted “control” over the day to day activities of the LLC, such members are generally required to be designated “member-managers” by the LLC.
- The member or limited liability partner must participate materially in the business activity. Such material participation may not be less than 100 hours within any taxable year.
- The LLC member or limited liability partner is an owner of capital. If the LLC member or limited liability partner is an owner of capital for only a partial year, the owner’s compensation deduction will be limited to a prorated compensation deduction as discussed in Administrative Rule 600.93-6.
If any of the above conditions are not met, the LLC member or limited liability partner shall be deemed a limited partner for purposes of the Portland Business License Tax and the Multnomah County Business Income Tax.
Generally, if an LLC member is designated in the U.S. Partnership Return of Income Tax (Form 1065 K-1) as a “General partner or LLC member-manager”, it will be presumptive evidence that the member is to be deemed a general partner for purposes of the owner’s compensation allowance deduction – unless evidence shows that the limited activity of the member is not sufficient to warrant the owner’s compensation deduction. Contrarily, if an LLC member is designated in the Form 1065 K-1 as a “Limited partner or other LLC member”, such member will be deemed a limited partner for purposes of the owner’s compensation allowance deduction unless the substantial activities of the member warrant the owner’s compensation deduction.
The authority for certain LLC members and LLP partners to be deemed general partners for purposes of the Portland Business License Tax Law and the Multnomah County Business Income Tax Law rests with the Division. If a dispute arises as to whether an LLC member or other limited partner may be deemed a general partner under this policy, the Division’s final determination signed by the Division Director shall be the final representation of such authority.
Example 1: Columbia Collective LLC is a five member LLC with all members having equal ownership and equal vote on business issues. The LLC owns a large commercial building. The members hire a non-member business manager to operate the rental activity. The business manager ensures that the property is maintained and collects rents due the LLC. All routine business activities are the responsibility of the business manager. The LLC members meet annually and occasionally vote via email on specific non-routine matters during the year. No member participates materially in the business activity. In this case, the Division will deem all members to be limited partners because they are not routinely engaged in the day to day business activity of the LLC.
Example 2: Rama Residential LLC is a three member family LLC with 50% of ownership in the father and 25% respective ownership by the mother and child. The LLC owns a 20 unit apartment complex. The father spends more than 100 hours per year repairing the apartments and collecting delinquent rents. The mother and child have no direct activity regarding the apartment complex. In this case, the Division will deem the father to be a general partner due to his activity and control. The other members will be deemed limited partners.
Example 3: Chuck’s Auto Repair LLC is a two member LLC with two 50% owners. Chuck Smith is the manager of the business and actively engages in auto repair. The second member has provided funds for Chuck to operate the business. Of the $150,000 net income of the LLC, $75,000 is designated as “Self Employment” income. In this case, the Division will deem Chuck Smith to be a General Partner. The other member will be deemed a limited partner.
8/23/2011 Thomas Lannom
Updated: 2009, August 2011