A recent article in the Arizona Republic by Robert Anglen shed some light on obscure taxes that can affect owners of LLCs. LLCs are often created for asset protection purposes as part of an advanced estate planning portfolio. Investors or small business owners can acquire property in the name of their LLC. When properly established, this can shield the asset in question or potentially shield other assets from liability occurring within the LLC.
However, there are potential problems. For example, using an LLC can trigger a city sales tax. A small business owner purchases a building through an LLC for asset protection. He then leases the building to himself. He never actually pays rent, never generates any additional profits from the ownership of the building, nevertheless a sales tax is charged to the owner of the LLC. When the tax is not paid, penalties and interest charges can significantly increase the amount owed.
The Arizona State Legislature attempted to address the issue but the solution they crafted did not include LLCs. While future amendments and clarifications to the law could eliminate the loophole, it certainly illustrates the need for small business owners to know and understand how different planning tools are used and how they may or may not be taxed. The article by Robert Anglen is quite good and is available at azcentral.com.
Contributed by MH Cave Creek Estate Planning Attorney West Hunsaker
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