1) The LLC should be classifies as passive activity?
2) Dr. Fielder would be able to deduct the $20,000 loss from the passive activity?
3) The LLC members should be treated as limited partners?
Conclusion/Discussion
The income earned from the LLC (Limited Liability Company) partnership cannot be treated as a passive activity because Dr. Fielder materially participates in the activity providing management consulting services for 375 hours (Code Sec. 469(e)). Hence, the ordinary business loss of $20,000 from the investment that he has as a limited partner cannot be offset from the $50,000 ordinary business income from the LLC since loss deductions from passive activities may only offset the income from passive activities (Code Sec. 7701(a)).
2) Dr. Fielder would be able to deduct the $20,000 loss from the passive activity?
3) The LLC members should be treated as limited partners?
Conclusion/Discussion
The income earned from the LLC (Limited Liability Company) partnership cannot be treated as a passive activity because Dr. Fielder materially participates in the activity providing management consulting services for 375 hours (Code Sec. 469(e)). Hence, the ordinary business loss of $20,000 from the investment that he has as a limited partner cannot be offset from the $50,000 ordinary business income from the LLC since loss deductions from passive activities may only offset the income from passive activities (Code Sec. 7701(a)).