Can I purchase 50% membership interest in an LLC as a tax strategy?

Thanks for the info! What about self-employment taxes? Would I have to pay those on my 50% of the profits too? And does it matter if I'm not actively involved in the day-to-day operations?

For an LLC taxed as a partnership, you'll generally pay self-employment taxes (Medicare and Social Security) on your distributive share if you're actively participating in the business. This is typically 15.3% on the first $160,200 of earnings (for 2023), then 2.9% Medicare after that. If you're not actively involved in the day-to-day operations, you might qualify as a "limited partner" for tax purposes, potentially avoiding self-employment tax on your passive income. However, this determination depends on several factors including your specific role, authority, and time commitment. The IRS looks at the substance of your involvement, not just what's written in the operating agreement.

Does it help with figuring out a fair purchase price for an LLC membership interest? My cousin wants to sell me 30% of his business and I have no idea if I'm overpaying.

I'm skeptical about automated tools for something this complex. How accurate is it compared to an actual CPA? Can it handle state-specific LLC tax rules too?

The business valuation module does exactly that - it analyzes the financial statements and industry benchmarks to suggest a fair valuation range. It saved me from overpaying by almost $20k by showing comparable businesses and standard multiples for my industry. For accuracy, I actually had my CPA review the recommendations, and she was impressed with how thorough it was. It handles state-specific rules for all 50 states, and it even flagged a particular issue with my state's treatment of guaranteed payments that my CPA hadn't initially caught. The tool was developed by tax attorneys and CPAs, so it's using the same analysis they would, just automated.

How does that even work? Is it legal? I thought the IRS phone system was designed to prevent line-jumping services like this.

This sounds like BS. I've been told repeatedly by the IRS that they're understaffed and everyone has to wait. You're telling me there's a magical service that gets you through? Yeah right.

It's 100% legal - they're not doing anything to "break into" the system. They just have technology that automates the hold process. You basically tell them what IRS department you need, and their system calls and navigates the phone tree for you. When a human agent answers, their system connects you. You're still waiting your turn in the queue, you just don't have to be the one sitting there listening to the hold music. For the skeptics - I was exactly like you. I thought it sounded too good to be true. But after my fifth attempt spending 2+ hours on hold and getting disconnected, I was desperate enough to try. The IRS is legitimately understaffed, but the service just makes the painful waiting process more efficient. You still talk directly to the same IRS agents, with the same wait time - you just don't have to be the one physically waiting on the phone.

That's an interesting alternative I hadn't considered. Would the interest I earn be considered passive income? And would the business still be able to deduct the interest payments? Seems like it could be win-win if structured properly.

Yes, the interest you earn would typically be considered portfolio income (not passive income in the tax sense, but not subject to self-employment tax either). It's reported on Schedule B and taxed at your ordinary income rate. The business could generally deduct the interest payments as a business expense, subject to certain limitations if the business is very large (which doesn't sound like the case here). This creates a tax-efficient arrangement where the business reduces its taxable income and you receive income without the complications of partnership taxation. You could even structure it with an equity conversion option if the business performs well and you later decide you want ownership.

What tax software did you use to handle your K-1? I'm looking at a similar situation and wondering if TurboTax can handle it or if I need something more specialized.

I started with TurboTax but switched to a CPA halfway through. TurboTax can technically handle K-1s, but it doesn't provide much guidance for complex situations. If your K-1 is straightforward it might be fine, but mine had unusual allocations, guaranteed payments, and some weird depreciation issues from business property. The best advice I can give is to either use a more specialized tax software like UltraTax if you're comfortable with tax concepts, or just pay for a CPA who specializes in partnership taxation. It's worth the money to avoid the headache and potential errors. My CPA actually found several deductions TurboTax missed that more than paid for her fee.