Choosing a Tax Year for a New Multi-Member LLC
Two individuals form a consulting LLC in March 2025, splitting profits 50/50. The LLC has not filed an entity classification election and has no majority owner. One member is a calendar-year individual; the other is a C corporation with a June 30 fiscal year. The members disagree on which tax year the LLC should adopt and whether they can simply pick the C corporation's June 30 year to simplify consolidation. They also wonder whether the LLC must obtain IRS approval before adopting a year, and what happens if the LLC later admits a new member who owns more than 50%. Cash-basis, no inventory, no seasonal business justification.
1. What tax year must the LLC generally adopt, and why can't it simply choose the June 30 year of the corporate member?
Read the worked answer
A domestic LLC taxed as a partnership generally must use the tax year of its majority interest owners (the partners who collectively own more than 50% of capital and profits). Here ownership is 50/50, so there is no majority interest holder. The next test is the principal partners test-all principal partners (those owning 5% or more) must share the same year. The two 50% members have different years (calendar vs. June 30), so this test also fails. Because no business-purpose exception applies (no natural business year, no seasonal justification), the LLC must adopt the calendar year-the year that produces the least aggregate deferral. It cannot elect the corporate member's June 30 year without IRS consent via Form 8716 for a business-purpose year. The calendar year requires no IRS approval; the default rule applies automatically.
2. If the LLC later admits a new member owning 60%, can the LLC change its tax year without IRS consent?
Read the worked answer
Possibly yes. The majority-interest-owner rule is applied to the ownership in effect for the first day of the requested year (or the date the year would begin). If the new 60% member has a June 30 year, the majority interest owner's year would be June 30, and the partnership could adopt that year-but only if it qualifies and follows the required procedures. A change in tax year generally requires filing Form 1128 (Application to Adopt, Change, or Retain a Tax Year) unless the change is to the required year under the automatic rules. The key judgment: majority interest is measured at the relevant testing date, so the admission of the new member can shift the required year. However, the change must be implemented with proper IRS filing/notification, and the partnership must not use the change to distort income (the annualization and short-period rules apply).