topic Does private fund LLC need to issue 1099-Misc for its investment management fee? in Business & farm

Does private fund LLC need to issue 1099-Misc for its investment management fee?

easyxpress — Thu, 03 Sep 2020 01:14:39 GMT

We have a multi-members LLC which is a private equity fund. One of the members is identified as the general (fund) manager who made all the investment decisions on the fund. This manager charges an investment management fee. Does the LLC need to issue 1099-Misc to the fund manager regarding the management fee? If not, is there other way to report so IRS knows this is the income to the manager?

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

mellish7777 — Thu, 03 Sep 2020 01:41:22 GMT

Partners and members get K1s and this sounds like a guaranteed payment that goes on a K1.

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

Rick19744 — Thu, 03 Sep 2020 13:30:57 GMT

If the multi-member LLC is taxed as a partnership (which I assume it is), then I agree with @mellish7777 .

A guaranteed payment is renumeration in return for services to the LLC. This is deducted on page 1 of the form 1065 and is a separately stated item on the Sch K and then allocated to the specific LLC member on their respective K-1.

Keep in mind, that while guaranteed payments are similar to receiving a wage, they are not treated the same. There is no W-2 issued as a member in an LLC taxed as a partnership is not an employee.

So the guaranteed payment is paid in full to the LLC member and the member is responsible for all taxes; both income tax and self-employment tax. The member should understand that they will need to make estimated tax payments on these earnings.

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

easyxpress — Thu, 03 Sep 2020 21:07:22 GMT

On the other hand, issuing 1099-MISC seems to accomplish the same thing. It doesn't seem to hurt anything tax-wise. Right?

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

mellish7777 — Thu, 03 Sep 2020 21:47:14 GMT

Yeah it WILL hurt tax-wise because the partner will get a K1 AND a 1099 for the SAME income and the IRS will expect the partner to report BOTH.......so that income will be double-taxed. Don't do that!

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

Rick19744 — Thu, 03 Sep 2020 22:03:13 GMT

Issuing the 1099 is NOT the correct way to handle this; plain and simple.

Doing so will open you up to filing an incorrect tax return and possibly penalties; depending on an agent's mood if audited.

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

Anonymous — Fri, 04 Sep 2020 05:43:33 GMT

WRONG. if it is to a partner and reported on the k-1 as guaranteed payment (which it should) then issuing a 1099 will result in double reporting the income and create tax problems for the recipient. the income will be picked up through the k-1 and the IRS will have no way of knowing that the 1099 is for the same thing and thus will send a notice to the taxpayer for the "unreported" income. it could even result in the partner being audited. Maybe even the partnership itself.

if it's not to a partner then the IRS says a 1099 should be issued to certain recipients.

From 1099-MISC instructions:

Form 1099-MISC, Miscellaneous Income, for each
person in the course of your business to whom you have paid
the following during the year:
• At least $10 in royalties (see the instructions for box 2) or
broker payments in lieu of dividends or tax-exempt interest
(see the instructions for box 8).
• At least $600 in:
1. Rents (box 1);
2. Prizes and awards (box 3);
3. Other income payments (box 3);
4. Generally, the cash paid from a notional principal
contract to an individual, partnership, or estate (box 3);
5. Any fishing boat proceeds (box 5);
6. Medical and health care payments (box 6);
7. Crop insurance proceeds (box 9);
8. Payments to an attorney (box 10) (see Payments to
attorneys, later);
9. Section 409A deferrals (box 12); or
10. Nonqualified deferred compensation (box 14).
You must also file Form 1099-MISC for each person from
whom you have withheld any federal income tax (report in
box 4) under the backup withholding rules regardless of the
amount of the payment.

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

Critter-3 — Fri, 04 Sep 2020 17:38:52 GMT

If the partner has their own separate business and that business bills the partnership for services rendered then that amount should be 1099 to the partner's business not the partner themselves and it becomes an expense to the partnership just like any other expense and the partner's business reports the income on that company's tax form along with any other income it generates.

Otherwise it is considered a guaranteed payment to the partner and no 1099 should be issued.

Re: Does private fund LLC need to issue 1099-Misc for its investment management fee?

easyxpress — Fri, 04 Sep 2020 18:33:32 GMT

Thanks. This settles my question.