Categorizing transactions not related to a specific property

Investor · San Francisco, CA · Member since 2022 · 36 posts · 41 votes

I have the following situation. I have two properties, each in their own LLC. If I have an expense that's only related to one property, say a utility bill, than I can expense it under that LLC. However, sometimes I have expenses that aren't related to either property. For example, paying a CPA to file taxes at the end of the year which involves both properties. Where should this transaction be reported? Can it just be expensed under one of the LLC accounts or should I have an entirely different account?

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

Quote from @Chris Seveney:

@Michael Plaks

GREAT post.

Curious as a cpa do you find too many investors setup these crazy corporate structures some guru taught them whixh over complicates their tax filings ?

Thanks for the compliment, Chris.

Not being an attorney, I cannot judge whether such structures provide the legal benefits they are meant to provide and whether they are necessary.

My main beef (substitute soy if you're vegetarian) with them is that investors do not follow the burdensome formalities required to maintain integrity of these structures. Probably making them useless.

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
You don’t want to split it 50/50?
My CPA divides everything like his fee, cell service, computer equipment over the properties.
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Jeff Nash
Accountant · McKinney, TX · Member since 2023 · 393 posts · 580 votes
3y
You just come up with a reasonable allocation method for "shared expenses" that benefit your operations as a whole and be consistent and stick to it assuming circumstances don't change.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3y
@Account Closed

This is not what you want to hear, but you might want to rethink your whole LLC approach. The concept behind creating an LLC for legal protection is that you create something legally separate from yourself.

However, you continue to think that "I have expenses..." Stop right here. You don't have any expenses. Your LLCs have expenses, not you.

Now, bear with me to give you an example that will sound ridiculous. You technically cannot hire a CPA for both properties. Each of your LLCs should be hiring your CPA to do their own tax preparation, PLUS you personally should be hiring a CPA to put it all together. Which means your CPA splitting his bill 3-way, and getting 3 partial payments: one from each of the LLCs and the third one from you personally.

Yes, I do realize that this sounds completely nuts, but this is what you're supposed to do if you truly maintain financial separation between your LLCs and yourself. Otherwise, you may be undermining your protection and potentially canceling whatever legal benefits you hoped to receive from your LLCs. I'm saying "potentially" because I'm not an attorney, which makes my opinion on legal matters worthless. Ask the attorney who recommended or set up your LLCs.

There is a less weird approach to dealing with your CPA and all other "shared" expenses, but it is still cumbersome. You pay for the entire tax preparation personally, but then your LLCs reimburse you for their respective portion. For example, you Zelle your CPA $1,500 for the whole job, and then each of your LLCs transfers $500 from its business account to your personal account. And you deduct $500 per property.

Now, can you push aside all this nonsense and simply deduct $500 per property for tax preparation on the "Legal and other professional services" line of your Schedule E? For tax purposes - absolutely. As an accountant, I don't care. But once again - this would not be a correct procedure from LLC's legal protection angle, and you need to check whether your attorney is comfortable with it.

Finally - can you pay and deduct the entire CPA bill from one of your two properties (reminder: they're not technically yours, they are your LLC's!)? No, you cannot. First, because it includes charges for the personal part of your tax return, not related to your rentals. Second, because all expenses are attached to a specific property.

It may seem that it would make no mathematical difference whether it's deducted from one property or spread between the two of them, and often it does not. However, in some situations, like when your losses are limited, it does make a difference.
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Jeff Nash
Accountant · McKinney, TX · Member since 2023 · 393 posts · 580 votes
3y
@Michael Plaks did a terrific job of explaining the technical angles of a seemingly simple question. To summarize from his comment, there is often significant judgment required on many issues and it will involve different professionals such as attorneys and accountants, and perhaps many others, so you'll often need to work as a team. In other words, certain topics are gray and you have to decide what course of action you are most comfortable with after understanding the pros and cons. In this particular case, Michael really laid it out for you and gave you a grand slam answer! You can also see why we as tax professionals are really compelled to use general language like "it depends" etc to fact patterns and questions, especially on these public forums where often times there are assumptions that have to be made and maybe only partial information is provided.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Michael Plaks
GREAT post.
Curious as a cpa do you find too many investors setup these crazy corporate structures some guru taught them whixh over complicates their tax filings ?
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3y
Quote from @Chris Seveney:

@Michael Plaks
GREAT post.
Curious as a cpa do you find too many investors setup these crazy corporate structures some guru taught them whixh over complicates their tax filings ?

Thanks for the compliment, Chris.

Not being an attorney, I cannot judge whether such structures provide the legal benefits they are meant to provide and whether they are necessary.

My main beef (substitute soy if you're vegetarian) with them is that investors do not follow the burdensome formalities required to maintain integrity of these structures. Probably making them useless.
4 Reply
Jeff Nash
Accountant · McKinney, TX · Member since 2023 · 393 posts · 580 votes
3y
@Michael Plaks and @Chris Seveney I completely agree that oftentimes the legal necessities are not followed which renders LLCs or other legal structures ineffective or useless. Not keeping any annual minutes or having an operating agreement as examples. This is the result of wanting to skimp on costs and opt for DIY solutions or not being aware of what is really required in the first place and having a maintenance program.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
Quote from @Jeff Nash:

@Michael Plaks and @Chris Seveney I completely agree that oftentimes the legal necessities are not followed which renders LLCs or other legal structures ineffective or useless. Not keeping any annual minutes or having an operating agreement as examples. This is the result of wanting to skimp on costs and opt for DIY solutions or not being aware of what is really required in the first place and having a maintenance program.

I agree, the most common one my attorney tells me is when someone transfers a asset to their LLC which was in their personal name. They do not "sell" the asset to the LLC they gift it/give it (which could have tax implications), but as noted in this and other posts, the LLC is not separate.
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Patty C.
Homeowner · CA · Member since 2014 · 125 posts · 33 votes
3y
@Michael Plaks
Thank you for your thoughtful post with detailed examples.
Awareness about the responsibilities and costs for entities such as LLC's need to be part of the presentations for LLC's.
There also needs to be a conversation about the investor’s level of risk tolerance in the likelihood of a lawsuit; what insurance and umbrella insurance covers and does not cover,etc.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
I normally create another activity and call it general admin / overhead.
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Eric Williams
Accountant · Houston, TX · Member since 2023 · 147 posts · 41 votes
2y
Quote from @Account Closed:

I have the following situation. I have two properties, each in their own LLC. If I have an expense that's only related to one property, say a utility bill, than I can expense it under that LLC. However, sometimes I have expenses that aren't related to either property. For example, paying a CPA to file taxes at the end of the year which involves both properties. Where should this transaction be reported? Can it just be expensed under one of the LLC accounts or should I have an entirely different account?

I usually see spreadsheets allocating based on gross rents to total, which makes sense.
If you want me to be really honest if the amounts are not that large I would divide by the number of properties. I'm not suggesting the audit lottery, but there is a cost benefit to be done. What benefit is there in accuracy to the tune of 10 to 20 dollars.
The IRS can literally not afford to hunt down 100 bucks. They are very selective. It has to be "worth it."
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Eric Williams:

Quote from @Account Closed:

I have the following situation. I have two properties, each in their own LLC. If I have an expense that's only related to one property, say a utility bill, than I can expense it under that LLC. However, sometimes I have expenses that aren't related to either property. For example, paying a CPA to file taxes at the end of the year which involves both properties. Where should this transaction be reported? Can it just be expensed under one of the LLC accounts or should I have an entirely different account?

I usually see spreadsheets allocating based on gross rents to total, which makes sense.
If you want me to be really honest if the amounts are not that large I would divide by the number of properties. I'm not suggesting the audit lottery, but there is a cost benefit to be done. What benefit is there in accuracy to the tune of 10 to 20 dollars.
The IRS can literally not afford to hunt down 100 bucks. They are very selective. It has to be "worth it."

I agree with Eric's practical angle. The exact method of allocation is not critical. Let's say you have a $1,000 and 5 properties. Can you assign $200 to each property? Sure.

What if one of the properties is a a multi-family, generating a lot more income than the others? Can you assign $600 to that property, and $100 to each of the remaining 4 houses? Sounds very reasonable. Can you assign the entire $1,000 to that one large property? Also yes, from a practical approach.

Like Eric said, the smaller the amount, the less important is the allocation.

Does it change anything? Possibly, for instance if suspended losses are involved. Would the IRS care? Probably not, especially with small amounts.
Finally, the original post was specifically asking about multiple LLCs. This brings completely different issues that I discussed in my earlier reply.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Basit Siddiqi:

I normally create another activity and call it general admin / overhead.
I do not.
1. This is an audit flag, creating a bogus "property" with zero income
2. If you're dealing with suspended passive losses, this approach locks the overhead expenses in the suspended bucket indefinitely

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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
2y
Quote from @Michael Plaks:

Quote from @Basit Siddiqi:

I normally create another activity and call it general admin / overhead.
I do not.
1. This is an audit flag, creating a bogus "property" with zero income
2. If you're dealing with suspended passive losses, this approach locks the overhead expenses in the suspended bucket indefinitely

Correct, on the return you do not want to create a separate property for overhead costs.

For some reason, when I was reading it, I was thinking the question related to recording transactions within an accounting software where I would create an extra class and call it admin / overhead.
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