h/w llc rental property income subject to se tax?

[taxdan]

New clients...husband and wife decided to move 3 rental properties into an llc. No other income involved with the llc and they are not r/e professionals.

Should I file a 1065 and 568 (LLC in CA)? Does this qualify as a "Qualifed Joint Venture" with the option to file just sch E? Is the income subject to s/e tax even though it's rental income?

Thanks for any help.

Dan

[ed_accountant]

You should prepare the 1040 and Schedule E like you have in the past with the exception of filing form 568 to California. Form 568 will require the CA minimum tax of $800. Form 568, Schedule IW - LLC Income worksheet Line 2a is where you list the gross rental income. You will also need to complete the form 568 Single Member LLC information and consent and check the box form 540.

Also, the rental should not be subject to S/E tax.

Thanks

[OldJack]

You should file federal form 1065 and income is not subject to SE tax.

[kcjenkins]

Since CA is a CP state. you COULD file an E on the 1040. However, I thin you'd be smart to file a 1065, just in case things change down the road.

[ed_accountant]

You could file form 1065 and form 8825, the rental real estate form that flows to the k-1 .. but since they are husband and wife and CA is a community property state.. it is not required. Form 568 is required either way you file this.. CA wants the minimum tax...

It may be worthwhile if you earn an additional tax prep fee... Cheers!

[michaelmars]

File the 1065. the more income that comes from a flow through, the better off you are. and as Ed said, more fees too. IRS defaults an LLC to a 1065 when you apply for the ein unless you stated that it was a single member

[OldJack]

The purpose of the LLC is for liability protection and filing as a partnership better indicates it is a business to protect.

[taxdan]

Thank you all for the input. I think the very last thing Jack stated makes me want to file the 1065 instead of just the sch E. That is the very reason they formed the llc and I will explain that to them. Also, as stated, more fees to me.

Thank you all again!

[jainen]

>>Since CA is a CP state. you COULD file an E on the 1040.<<

California has the same rules as federal for Qualified Joint Venture, which is not available for a business conducted under a "state law entity" like a limited liability company. [source: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses]

Community property laws are an entirely different matter. They apply equally to partnership and sole earnings.

[kcjenkins]

Thanks for that, Jainen. Always something to learn. Since I do few CP state returns, I missed that one.

[taxdan]

That was a very helpful link Jainen and made the decision clear cut. Thank you.

[jainen]

>>made the decision clear cut<<

Truly sorry about that--generally my intention is to muddy things up! Remember that mere co-ownership of rental property does not in itself constitute a partnership. If spousal co-owners can file a single Schedule E, why can't spousal co-owners in a disregarded entity do the same?

[taxdan]

But Jainen, doesn't having formed the husband and wife llc negate the choice to file two separate E's as per your link?...

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

[mcb39]

Here, in Wisconsin, also CP State, I have a few LLC Married Couple Partnerships. We file 2 Schedule Cs and split the income and expenses according to who does what. It is a lot of work, but so is a 1065 which is more expensive. My personal goal is to save my clients money; not charge them more for unnecessary paperwork.

[jainen]

>>doesn't having formed the husband and wife llc negate the choice to file two separate E's<<

Yes--an LLC can never be a qualified joint venture in any state.

Thank you for the citation of Rev Proc 2002-69, which says the spouses in a CP state can choose to file an LLC as a partnership or a disregarded entity (sole proprietorship). Sorry Marilyn, that means only a SINGLE Schedule C or Schedule E! If they both want Social Security earnings, they must report their separate earnings on a partnership return. Or hire one spouse as an employee of the other.

Apparently there is no authority for LLC spouses in other states to file anything except partnership. (Of course, any of these can elect to be taxed as a corporation.)

[OldJack]

>>but so is a 1065 which is more expensive.<<

Form 1065 is much easier than splitting individual items on 2 Sch-C's (which is also incorrect reporting).

[taxdan]

I apologize for my confusion, but do I have this correct....

Because CA is a CP state, I have the OPTION to file ONE Sch E even though the husband and wife formed an llc together? The llc could be a disregarded entity in this case due to CP rules? Even though filing a 1065 may be the safer route to take.

I do NOT have the option of filing TWO Sch E's due to Rev Proc 2002-69 mentioned above?

[jainen]

>>do I have this correct<<

Yes, you have your options correct--but your reasons are backwards! You can not file two Schedule E's because that would mean a Qualified Joint Venture, which is not allowed for an LLC. In most states that means you would have to file a 1065, but the ruling allows you to file ONE Schedule E on a joint return in a community property state.

So, 1065 or one Schedule E. The 1065 might have advantages if this were a business, but you probably don't need it for rentals..

[OldJack]

If it looks like a duck, calls itself a duck, and talks like a duck, it should be treated as a duck for tax purposes.

[mcb39]

Too bad we can't get CE credits for what we learn on this board. I have been e-mailing your comments to client in question. I only have one left who wants to "split the income", which used to be an option in ATX just by clicking on a box at the top of the Sch C. I have been trying to fire this client anyway.......have already stopped doing their payroll and sales tax reports; so maybe this will do the trick. Thanks for the input.

[taxdan]

I must agree that I do learn an awful lot on this board. Thank you all for your input and a thorough answer to my original question!