Single Member LLC Schedule E 2013 Schedule C 2014

24 Replies

I had changed accountants between 2013 and 2014. The new accountant is insisting that I need to file a schedule C instead of a schedule E. In my opinion, I thought that continuing to use a schedule E would be the way to go.

All the rental property ( three homes ) were quick claimed to my Califonia LLC. The are losses that need to be passed through to my personal income. Which is the more correct filing form? What is the maximum loss that may be passed through from the LLC to the personal return?

Thank you in advance for your replies.

@Erick Garske honestly without knowing the technicalities of your tax position, it will be impossible to give you any sort of helpful advice. Consider contacting a CPA specializing in real estate to help you prepare your taxes.

A single member LLC does not exist in the eyes of the IRS. Its a pass through entity. Income and expenses are reported on the Schedule E. I believe you are allowed to take up to $25K in losses from passive income to offset other income. If you had a single member LLC for any other business other than owning rental properties you would file the Schedule C.

Unless these are vacation rentals being leased short term such as by the week they go on Schedule E.

Rob Beland sounds right to me. $25k up to $100k in active income and $15k for greater.

Thanks for the prompt replies, and for confirming that these need to be filed using a schedule E.

Originally posted by @Steven Hamilton II :

Unless these are vacation rentals being leased short term such as by the week they go on Schedule E.

Steve I believe you are thinking about income that is derived from operating a business and you are providing services such as daily cleaning. This is more like if you ran a hotel or an inn. If you own a condo and do weekly rentals you likely hire a cleaning company in between but that would just be an expense for cleaning services on the Schedule E. Even expenses for a management go on SE.

The issue is that you've quit-claimed them over to your LLC. Technically, single member LLC activity is reported on Schedule C, regardless if you're renting property or selling ice cream cones. In continuing to report it on Schedule E, you've just undone all of the limited liability you gained by putting it in the LLC because now you're taking a personal tax position on a business asset and piercing the corporate veil just became the easiest thing in the world for any attorney that does discovery on your income tax return.

Originally posted by @Linda Weygant :

The issue is that you've quit-claimed them over to your LLC. Technically, single member LLC activity is reported on Schedule C, regardless if you're renting property or selling ice cream cones. In continuing to report it on Schedule E, you've just undone all of the limited liability you gained by putting it in the LLC because now you're taking a personal tax position on a business asset and piercing the corporate veil just became the easiest thing in the world for any attorney that does discovery on your income tax return.

 Thanks Linda. I appreciate the feedback! Are the passive losses the same as well? 25k maximum?

Originally posted by @Erick Garske :
Originally posted by @Linda Weygant:

The issue is that you've quit-claimed them over to your LLC. Technically, single member LLC activity is reported on Schedule C, regardless if you're renting property or selling ice cream cones. In continuing to report it on Schedule E, you've just undone all of the limited liability you gained by putting it in the LLC because now you're taking a personal tax position on a business asset and piercing the corporate veil just became the easiest thing in the world for any attorney that does discovery on your income tax return.

 Thanks Linda. I appreciate the feedback! Are the passive losses the same as well? 25k maximum?

 No - Once losses are on Schedule C, it follows the same rule as regular business losses - pretty much unlimited against your other earned income and also subject to Net Operating Loss rules.  But profits are also subject to Self Employment taxes, so there's plusses and minuses to both methods.

The issue with taxes is that it is both an art and a science to maximize tax savings and balance other needs and it's really important to sit with a knowledgeable CPA and talk about your specific situation (not your friend's, not somebody else on BP, not your mentor) and have them help you design a tax plan built for you.  You've got to take so many issues into account when thinking about real estate that it's impossible to issue a blanket statement of "X is the best plan".  Relationship needs, other income status, retirement planning issues, estate planning, etc, etc, etc all come into play.  It usually takes me a good hour, maybe two - plus another hour or two with their prior tax returns and calculations on current activity, to really understand a client's situation and goals in an interview and put together a plan that both is ideal for the client and something they can follow.  I've seen many tax plans fall apart because it was just too complex for the client to understand and implement.

@Linda Weygant while we all appreciate people who offer advice, it needs to be accurate, especially when it comes to taxes and liability protection.

A single member LLC is disregarded for tax purposes. If that LLC owns rental property, that passive activity is reported on Schedule E, not schedule C. Owning rental property is 100% different than selling ice cream cones. Rental property is passive, selling ice cream cones is active and therefore no reported on the same schedules.

Further, reporting assets held by an LLC on your schedule E has nothing to do with liability protections offered by the LLC.

The OP needs to get with a knowledgable accountant/CPA.

Originally posted by @Brandon Hall :

Linda Weygant while we all appreciate people who offer advice, it needs to be accurate, especially when it comes to taxes and liability protection.

A single member LLC is disregarded for tax purposes. If that LLC owns rental property, that passive activity is reported on Schedule E, not schedule C. Owning rental property is 100% different than selling ice cream cones. Rental property is passive, selling ice cream cones is active and therefore no reported on the same schedules.

Further, reporting assets held by an LLC on your schedule E has nothing to do with liability protections offered by the LLC.

The OP needs to get with a knowledgable accountant/CPA.

I think you will find that CPAs give varying advice on this with some advocating a very strict interpretation of Single Member LLCs always following through to the Schedule C while others interpret it as rentals always following through to the Schedule E.  I have seen it both ways on various tax returns that I have worked with.  

The IRS has this to say about it:  http://www.irs.gov/Businesses/Small-Businesses-&-S...

Specifically this part here:

******

Owner of Single-Member LLC

If a single-member LLC does not elect to be treated as a corporation, the LLC is a

@Linda Weygant of course, here to help.

Generally, businesses are reported on schedule C, however interests in rental real estate activities are reported on schedule E.

Rental real estate is considered a passive activity and as such is reported on schedule E. If the owner is performing substantial services (think hotel services) then the rental activity is reported on schedule C, but for most landlords this will not be the case.

Even if you insist on reporting your client's rental real estate activities on schedule C you will be doing them a disservice. Once their passive losses are consumed, you will be subjecting their income to self employment tax when the whole point of buy-and-hold rentals is to avoid taxes.

I'd take a read through the schedule E instructions. They spell it out pretty plainly and don't allow much room at all for interpretation.

I'd also double check with your friend about the LLC schedule E liability issue. Logically, his/her explanation doesn't make sense. There were probably material issues that caused the judge to toss the LLC.

@Brandon Hall

 - I wanted to circle back around to this discussion because it's been on my mind.  I hate not having clarity on a tax issue, so I brought this up at a colleague breakfast last Saturday where we all get together after April 15 and lament our issues that came up during the season.  Note that I don't do taxes for a living any more.  I do them for a very small handful of friends and family these days.  I brought up the issue of single member LLCs, rental real estate, schedule C and schedule E and I have to say it caused quite a bit of debate amongst the group.

There were about 40 CPAs present during the "official topics" discussion and the following issues surrounding this came up.

1 - if a landlord receives a 1099 for the rental income, there was some discussion about avoiding an IRS matching inquiry letter and so some CPAs would put the rental income on a Schedule C for the sole purpose of being able to report the income under the LLC EIN and so the matching criteria would be met. Others in the room said that the matching scenario for rental income, where box 1 (Rental Income) is indicated is not nearly as rigorous as for when box 7 is used (Misc Income) and that they did not feel that a mismatch between box 1 would necessarily kick off a letter from the IRS. Those that did think a letter might be kicked off indicated that they could clear up the issue with a very brief letter and it would be no trouble.

2 - there was a discussion of passive loss limitations and how, at certain income levels, a loss on a schedule C is essentially the same as a loss on a schedule E, so it didn't really matter how losses were presented.  For those of us who are concerned with uniformity and the likelihood of rental properties swinging drastically between losses and profits, those folks were sort of shouted down pretty quickly.  Clearly there is a need to report the same activity in the same (correct) manner, regardless of the actual tax outcome.  It was clear that a few of the folks in the room have become a bit lazy over the years.

3 - the topic of "rooming houses" vs housing rental was discussed.  The vast majority of those in the room feel that schedule C is best used only for rooming houses where significant additional services are included with house rental.  (This is consistent with your original message).

4 - I brought up the issue of the LLC liability issue - where a personal tax position (using schedule E) being used as a primary tool for piercing the corporate veil was used and the room primarily pooh-poohed such a concept and said there was clearly more to the story than what I was getting. However there were a small handful of tax attorneys in the room and they opined as how they could see that method having some merit in a perfect storm of scenarios, judges, plaintiffs and defendants. None of them had actually heard of it being used though. But personally I think attorneys will always allow for a possibility of *anything* occurring. I did not go back and ask my original source for my information as I suspect it is a very upsetting topic and I didn't really care to pick the scab off that wound.

So....

I wanted to thank you for bringing to my attention the issue between Schedule C and Schedule E. None of my clients own property within a single member LLC, so my misconception had no bearing on my clients as I've never reported rental income on a Schedule C, nor will I if the opportunity presents itself. So thanks for that. So for anybody reading my original post, please disregard that.

I also wanted to thank you for making me question the corporate veil piercing as well.  It didn't hold up to further scrutiny, so I take back my comment on that as well.

Just a shout out to both of you - @Linda Weygant Weygant and @Brandon Hall (what's up, Brandon?).  This thread might just be the most helpful, best example of quality discussion on the entire internet.  Seriously.  I'm working through a complex tax reporting scenario and this was extremely helpful to get me grounded and pointed in the right direction.

Most people just do fly-by commenting and opining - Lynda, I really appreciate your following up with your group and posting the consensus notes.  Brandon - thanks for respectfully challenging information that's out there.

Great post! with no other income, just my typical rental properties (no boarding/temporary) it appears that all income is passive and should appear on my schedule E. How do we handle overhead expenses such as home office deduction and medical?

@Linda Weygant ,

I would more readily believe that the single member LLC veil was readily pierced if the owner of the LLC also self managed the properties. Now, the LLC owner is also personally liable for failure to do something that should have been done, or not getting something done right.

Hi everyone...hate to bring up an old subject BUT, I have a VRBO property where the rental period is always 7 days or less. I have read one of Brandon's previous articles "https://www.biggerpockets.com/renewsblog/2015/07/0... and it seemed pretty clear that I would fall under C. I filed E last year because I had some friends that insisted it was passive income and therefore did not apply but we've had some substantial losses last year, this year, and will also have quite a bit next year due to 25k in remodeling the first year, special assessments this past year and next year for redoing the siding and decks on the outside of the condos. I calculated the return last year as schedule C just to see the benefit and there was a substantial return due to the losses whereas schedule E didn't make a big change primarily because my AGI prohibited me from deducting the passive losses under E. My CPA friends said I would most likely get audited because there are dramatic changes on my return as a result of the schedule C. Acting as a business, and getting a larger than normal return due to the losses. I don't mind getting audited but my friends also said that this topic is very subjective and if the auditor doesn't agree with me, I would be responsible for the error and would possibly get fined for the error.  I hate to beat a dead horse but do I fit under E or C? Thanks!

The treatment may change from one year to another. It is not very subjective; however, I've had to correct many auditor on said issues.

If it is rented at the stated occupancy rate it WILL be reported on Schedule C.

Welcome to BP. 

If it's a single member LLC, it goes on Schedule C.

Hope it helps.

thank you all @Steven Hamilton II and @James Syed  for the replies...looks like I need to go back and amend last years return and get an extension for this year. Also need to find a good Real estate savy CPA in the houston area. Thanks!

@Billy Dana

Most of us can work with clients worldwide. Someone here might be able to offer a referral.

@Steven Hamilton II . I'm hoping I can start locally...just like to be face to face with someone but if it doesn't pan out, i'll definitely widen my search. thanks for all the info!

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