Changing an LLC's tax year: an LLC's tax year is generally determined by its members' tax years, although LLCs with a qualifying natural business year can apply to use a year end based on its natural business year.

• Author: Ellentuck, Albert B.
• Position: Limited liability companies

The tax year a limited liability company (LLC) is required to use generally is the tax year of the members who own, in the aggregate, more than 50% of the interests in the LLC's capital and profits (Sec. 706(b)). If there is no member or combination of members with the same tax year owning more than 50% of capital and profits, the LLC's required year is the tax year of its principal members. Principal members are those owning 5% or more of either capital or profits. If neither the majority-interest rule nor the principal-members rule applies, the LLC's required year is the year end resulting in the least aggregate deferral of income to the members.

An LLC's required year can change for several reasons:

1. The members holding majority interests change or their year ends change; however, the consistency rule discussed below may prevent a change in some cases.

2. The principal members or their year ends change.

3. The year end with the least aggregate deferral changes; however, the consistency rule or de minimis rule discussed below may prevent a change in some cases.

   A change in the LLC's required year is treated as automatically approved by the IRS (Rev. Proc. 2006-46). Annualization of the short period income is not permitted (Regs. Sec. 1.706-1(b)(8)).

   Consistency and De Minimis Rules

   The least aggregate deferral of income is determined by multiplying each member's percentage of LLC profits for the year by the number of months of deferral that would arise through selection of the proposed year end (Regs.

   Sec. 1.706-1(b)(3)). Months of deferral are counted by going forward from the proposed LLC year end to the members' year ends, using the information available at the beginning of the current tax year. After testing each proposed tax year, the year producing the least aggregate deferral of income is the required year. If the test produces more than one qualifying tax year, the LLC can select any one of those years. However, under a special consistency rule, if one of the year ends meeting the test is the LLC's existing year end, the LLC must retain its existing tax year.

   If the tax year with the least aggregate deferral produces a difference in aggregate deferral less than 0.5 in comparison to the aggregate deferral of the LLC's existing tax year, a de minimis rule is applied. The LLC's existing tax year is treated as the tax year with the least aggregate deferral, and no change in tax year is necessary or permitted (Regs. Sec...