IRS Memo Explains that Not All LLCs Are Exempt from Section 6041
Brief Background
All persons engaged in a trade or business who, in the course of that trade or business, make payments of $600 or more to another person are required to report the payments to the IRS under section 6041 (e.g., Form 1099-MISC). [1] There are, however, exemptions under Treasury regulations.[2] Notably, returns of information are not required under section 6041 for payments made to a “corporation described in § 1.6049-4(c)(1)(ii)(A).”[3]
Sometime individuals get confused and believe that LLC stands for “limited liability corporation.” As a result, they believe that LLCs are therefore exempt from information reporting.
Recent Guidance
On Friday November 21, 2014, the IRS released ILM 201447025, which succinctly clarifies that limited liability companies (LLCs) that have not elected to be classified as a corporation are not exempt from section 6041 reporting requirements (e.g., Form 1099-MISC).
Payments to LLCs are exempt from section 6041 reporting requirements only if the LLC has elected to be classified for federal tax purposes as a corporation by filing Form 8832.
Therefore, all persons engaged in a trade or business who, in the course of that trade or business, make payments of $600 or more to an LLC that has not elected to be taxable as an association, are required to report the payments to the IRS.[4]
Takeaway
If you make payments of $600 or more, in the course of your business, to an LLC, then you must take steps to determine if the LLC has elected to be treated as a corporation for federal income tax purposes or else you must follow the section 6041 reporting requirements (e.g., Form 1099-MISC). Payments to LLCs that are treated as sole proprietorships (i.e., SMLLC owned by an individual) or LLCs treated as a partnership must be reported.[5]
End notes:
[1] Section 6041
[2] Treas. Reg. § 6041-3.
[3] Treas. Reg. § 1.6041-3(p)(1).
[4] Section 6041(a).
[5] Additionally, the term corporation includes “a partnership all of whose members are corporations … , but only if the partnership files with the payor a certificate stating that each member of the partnership” is a corporation. Treas. Reg. § 1.6049-4(c)(1)(ii)(A).