Could one owner combine two single-member LLCs on one Virginia pass-through return after electing S-corporation treatment for both?

Subject

S-elected single-member LLCs had to file separate Virginia returns

Plain-English summary

Each LLC had to file its own Virginia pass-through entity return. Ordinarily, a single-member LLC can be disregarded for federal tax purposes. Here, the owner elected to treat each LLC as an S corporation, making each a separate entity for federal and Virginia filing purposes.

Federal grouping of the LLCs' activities could affect material participation and passive-loss limits, but it did not merge the entities or change Virginia filing requirements. Virginia required each recognized pass-through entity to file an annual information return and had no combined-return provision.

Result: the two LLCs could not file together; each had to file separately.

What this means for you

• An S-corporation election can turn a disregarded single-member LLC into a separate filing entity.
• Federal passive-activity grouping does not consolidate legal entities for Virginia returns.
• Track each LLC's income and owners separately.
• Review entity-classification elections before assuming a no-return rule applies.

Common questions

Q: Were the LLCs disregarded because each had one owner?

A: No. Their S-corporation elections made them separate, non-disregarded entities.

Q: Did Treasury activity grouping permit one return?

A: No. That election addressed passive-activity analysis only.

Q: Did Virginia allow a consolidated pass-through return?

A: No provision permitted one for these LLCs.

Citations and references

• Va. Code §§ 58.1-301, 58.1-390.1, and 58.1-392.
• IRC § 469; Treas. Reg. §§ 1.469-4, 1.469-1(T)(e)(1), 301.7701-2(a), and 301.7701-3.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-209

Original ruling text

October 29, 2015

Re: Request for Ruling: Pass-Through Entity Income Tax

Dear *:

This will reply to your letter in which you (the "Taxpayer") request a ruling concerning filing pass-through entity returns.

FACTS

The Taxpayer is the sole member of two Virginia limited liability companies (the "LLCs") that elected to be treated as S corporations for federal income tax purposes. The Taxpayer requests a ruling regarding whether she can combine the businesses for purposes of filing Virginia pass-through entity returns.

DETERMINATION

Passive Activity Loss Limitations

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC), unless a different meaning is clearly required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia .

The Taxpayer states that she made an election under Treas. Reg. § 1.469-4 to group the activities of the LLCs together for the purposes of filing and calculation of gain or loss. IRC § 469 generally provides that losses from and credits attributable to passive trade or business activities, to the extent they exceed, respectively, income from or the regular tax liability associated with all such passive activities, are disallowed for the taxable year and carried forward to the subsequent taxable year. Treas. Reg. § 1.469-4(c)(1), however, provides that one or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of § 469. Thus, taxpayers can avoid the application of passive loss limitations if they can show material participation in the group of activities that is considered a single activity. That is because an activity in which a taxpayer materially participates is not considered passive. See Treas. Reg. § 1.469-1(T)(e)(1). Such grouping of activities is relevant only in determining whether passive loss limitations apply for federal income tax purposes and has no bearing on the filing requirements of a pass-through entity in Virginia.

Pass-Through Entity Returns

All pass-through entities are required to file an annual information return with the Department setting forth their income and a list of their owners. See Va. Code § 58.1-392. By definition, a pass-through entity includes a limited liability company that is recognized as a separate entity for federal income tax purposes. See Va. Code § 58.1-390.1. Normally, single member LLCs are disregarded entities for federal income tax purposes and thus would not be required to file Virginia pass-through entity returns. See Treas. Reg. § 301.7701-3(b)(1)(ii). Because the Taxpayer elected to treat the LLCs as S corporations, however, they are considered separate entities that are not disregarded. See Treas. Reg. § 301.7701-3(c)(1)(v)(C) and § 301.7701-2(a). Therefore, the LLCs are pass-through entities required to file Virginia pass-through entity returns. Because there is no provision in Virginia law permitting the filing of combined or consolidated pass-through entity returns, each of the LLCs is required to file a separate return.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any q uestions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6022899134.M