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jrudd
10-13-2012, 03:17 PM
I've been digging for an answer to this question with no luck.
Situation:
Single Member LLC
Member has a fixed income(retired)
Start-up LLC will have no income or profit for 3-4 years(product development phase)
Question: Will the Member have to file a Form SE and for that matter, have to pay Self Employment Tax on his
fixed income from which he was using to fund product development?

I can't believe that would be true but I've learned some strange things(to me anyway) in my research to determine if best to form a Single Member or Multi- Member LLC
Thanks,
John

Evan
10-13-2012, 09:20 PM
If you don't have a taxable net income from the business, then no Schedule SE will be required.

The "fixed income" your receiving, which is apart from this business, may be subject to income taxes depending on where it's coming from. If it's a pension, that's reported elsewhere (no different having a business). Same with social security, etc.

Keep in mind if you have absolutely NO other income other than say, social security, when you DO have a profit, that may affect the taxability of your social security benefits. Therefore, if you think there are going to be multiple years of losses, you may be subjecting yourself to some scruitny. You should also consult with an accountant to determine which costs should be capitalized until your business is operational. For example, if you're spending a few years to develop a widget, the costs incurred shouldn't be expensed until you actually sell a widget in the future.

jrudd
10-14-2012, 01:49 AM
Thanks for your thoughts on this. Now I know that my fixed income from SS, pension, annuities, and IRA draw is separate from any income from the LLC and would not be subject to the SE Tax. I do see your point that when I do gen income from the LLC it will begin to affect SS due to having the other taxable income as well. I'm 66 now and I would not expect to gen significant income from the project I want to work on for several years.(nature of larger projects)

I would expect to have some income from sale of one or two products I have developed already but I'm in the design phase of a larger effort in which I will need several thousand for R & D materials and outside services(machining etc) to construct a prototype. I thought all R & D costs could be expensed.I don't think I'll be able to fund this project myself(which is what I want to do instead of involving outside money) unless I get some help on my taxes by being able to deduct R & D expenses through the Single Member LLC. I've had this concept in my head for a couple years and I just have to design it even if I can't afford to build the prototype. I think it's hard for Engineers to retire and stop working on neat stuff.

Evan
10-14-2012, 05:46 PM
R&D can be expensed, however you need to make that election (by deducting them). R&D, for tax purposes, are generally capitalized.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Current-year-Deduction-of-Research-&-Development-Expenditures
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Research-and-Development---Manufacturing-Tax-Tips
(http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Current-year-Deduction-of-Research-&-Development-Expenditures)