Partner and I are 50-50 owners and founders of a successful manufacturing company we started in 2006 as an LLC filing federally as an s corp.
call it OldCo.
we both worked 40 hours a week for years, and easily met the material participation requirements.
we sold most of OldCo company 8 years ago (2015) to another LLC (NewCo) and it’s grown to dozens of employees, and our original OldCo continues to own 20% of that new company. It is the only business and income that OldCo has.
I have had to work for our original OldCo company this last year, and have been paid a fair hourly wage, over 100 hours this year, so I believe that I meet the material participation requirements (since I am the only one working for our company)
my partner has done no work directly for our original OldCo company, BUT she worked for the NewCo LLC company (that OldCo owns 20% of) full time before retiring last fall.
that new llc company is now selling the entire company!
We (OldCo) will get 20% of the proceeds of that sale.
Since I have worked over 100 hours so far, I don’t think I will have to pay the additional 3.8% tax, right?
But what about my partner?
she hasn’t worked for our company directly, exactly (we don’t pay her a salary from OldCo) but… she worked full time for the manufacturing company, which is a pass through llc, that we owned 20% of… so she has clearly Materially Particapated in that company that is selling, so… we don’t think she should have to pay the 3.8% additional taxes, either, right? Because, although she may not be directly materially participating in OldCo, which is going to give her the k1, she clearly materially participated in the company that is selling, so I think she clicks the box that says “yes” to material participation, when filling in TurboTax next year, and therefore avoids the 3.8%, right?
