1065 Rentals

[ILLMAS]

This is the first time I see this, so would like to get others opinions to see if this appropriate, I am reviewing a prior year partnership return that has two rental properties, however non-rental expenses were reported on the front of the 1065.  Prior preparer reported the following expenses on the 1065 instead of form 8825:

Bank charges

Tax Prep Fees

Travel

Auto Expenses

Communication Expense

Telephone

Meals

I am ready to send an email to my client for them to explain to me why all of there expenses seem high for the amount of rent they collect, also their personal residence is less then a mile away from their rental properties and they reported 8K plus mileage.  My question is shouldn't these expenses be divided between properties and maybe recommend for them to amend the prior to move the expenses from the 1065 to the 8825.  I would understand if a management company had rental properties, the normal operations would be reported on the 1065 and the rental activity on the 8825.

[rfassett]

I agree with your analysis.

 

[Roberts]

I agree also.

[DANRVAN]

Maybe the return was prepared by the "Tax Doctor" and he prescribed some under-the-counter deductions for chronic tax pain.

[ILLMAS]

I agree with everyone that agreed, and being in agreement with the topic. 

[michaelmars]

don't  have to allocate to each property, set up an extra property called admin building and put them all there.  same results less hassle and we do about 1000 returns like this per year, no issues with irs. 

[DANRVAN]

40 minutes ago, michaelmars said:

don't  have to allocate to each property, set up an extra property called admin building and put them all there.  same results less hassle and we do about 1000 returns like this per year, no issues with irs. 

I don't see issue with allocating, but see an issue of creating ordinary losses as described in original post. 

[Abby Normal]

Just thinking out load: If you don't allocate and you have passive loss carryovers, each property would not have the correct losses associated with it, which would be a problem on disposal.

[Terry D EA]

Okay I do handle a few 1065 rental returns. The partnership can have ordinary expenses outside of the rental expenses. Some of those can be legal fees related to the partnership itself, annual report fees for the State, here in NC anyway, office supplies and accounting/tax preparation fees that should be on page one of the 1065 form.

Your client should keep a separate mileage log for each property to properly allocate the expense. Mileage and auto expenses are not deductible on a rental, just travel mileage to and from to perform services on the rental property. Only meal deduction would be to entertain new business and is only 50% deductible reported on the M-1 and K-1 resepctively as a non-deductible expense for the other 50%.

If any evictions take place, those expenses are allocated to the individual property. Remember, the partnership is an entity filing form 1065 that can experience ordinary operating expenses.

If your client has improperly reported previous expenses, you should advise them to amend with the explanation they are responsible to file an accurate tax return. If they choose not to amend, then move on as it is not your problem. With that said, if incorrect depreciation has been taken, then the same approach but use form 3115 to correct it. That would be a requirement that would determine whether I took on the client or not.

[DANRVAN]

13 hours ago, Abby Normal said:

Just thinking out load: If you don't allocate and you have passive loss carryovers, each property would not have the correct losses associated with it, which would be a problem on disposal.

Yes, that is true. It is not that difficult to make a reasonable allocation. 

[DANRVAN]

10 hours ago, Terry D said:

Okay I do handle a few 1065 rental returns. The partnership can have ordinary expenses outside of the rental expenses. Some of those can be legal fees related to the partnership itself, annual report fees for the State, here in NC anyway, office supplies and accounting/tax preparation fees that should be on page one of the 1065 form.

I disagree with your logic. Maybe it's because it Friday night, I am fighting the flu bug with a pounding headache, but I don't see how you can justify creating an ordinary loss from a passive activity.

[Terry D EA]

Well we certainly can agree to disagree and I respect your position. However, why cannot a partnership have ordinary business income/loss that is not a direct expense of a rental activity? I do agree the rental activities in and of themselves are passive activities. As I stated, a partnership formed in NC is required to pay and file an annual report fee that is not a rental expense but a partnership expense. One could expense everything on the rental 8825 and the bottom line would be the same. But I choose to pay attention to a lot of detail.

[DANRVAN]

The bottom line is not the same.  An ordinary loss and passive loss can have very different tax consequences.  The expenses are those of managing  a passive activity and therefore should be allocated to the passive activity. 

The expenses of a partnership that is strictly involved in a passive activities should be allocated to those activities. If the partnership has both business activities and rental activities then an allocation would depend on reasonableness and materiality.

Beside the annual fee, you also mentioned that legal fees, office supplies and accounting/tax preparation fees should be reported on form 1065.  Can you give a cite where these expenses are allowed to create a ordinary loss when there is no ordinary income? 

[Terry D EA]

I don't think I ever said that "expenses were allowed to create a ordinary loss when there is no ordinary income." I am confused but totally agree with your first two statements which I thought that was what I was saying. Maybe I went about it the wrong way. Here is a link to a document from the IRS that supports what I am saying.

Do you agree if there were not any ordinary business income in any given year,  ordinary business expenses could cause a loss that can be carried forward?

I stated the bottom line would be the same just quickly thinking if you deducted the expenses on the 8825 or took the same amount as a business or income, that outcome would be the same at the partner level.

https://www.irs.gov/businesses/small-businesses-self-employed/passive-activity-losses-real-estate-tax-tips

[DANRVAN]

22 hours ago, Terry D said:

Okay I do handle a few 1065 rental returns. The partnership can have ordinary expenses outside of the rental expenses. Some of those can be legal fees related to the partnership itself, annual report fees for the State, here in NC anyway, office supplies and accounting/tax preparation fees that should be on page one of the 1065 form.

So in the case of partnership with income from only rentals, you are creating an ordinary loss by deducting the expenses mentioned above on page 1 of 1065.  That is not supported by the IRS document in your link.