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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Owner of a CPA firm
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Partnership & S-Corp Tax I file partnership tax returns

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Partnership & S-Corp Tax ?

I file partnership tax returns for my LLC. The LLC is used to rent residential real estate. I am a partner, one of two owners, in the LLC.

As of yet, I do not deduct expenses for the work that I do. May I deduct expenses for the work that I do- such as managing the property or cutting the grass? If I can deduct these expenses, what documentation should I keep and how much can I charge? Could you please refer me to a particular tax publication/page if I can deduct these expenses?

Assuming I can not deduct these expenses, is there any way for me to do the work and deduct these expenses (for my time)? Are their any considerations that I should keep in mind when doing this?

An LLC can elect to file taxes an S corporation. If I were to elect the LLC to file as an S corporation (instead of as a partnership), could I save on social security or other taxes? I am not sure if this would benefit me since I rent residential real estate. Could you please refer me to a particular tax publication/page if I can save on taxes using this method? Do you see any issues with electing the LLC to file as an S corporation?
Submitted: 4 years ago.
Category: Tax
Expert:  BK-CPA replied 4 years ago.

S-Corps cannot use special allocations or make partnership elections, etc., so you are more limited, but at the same time you're not subject to self-employment tax on rental income anyways with a partnership, so typically I'd suggest a partnership other factors held equal.

 

Your services are a deduction for the partnership, and income to you. Your taxable income should go up and your partner's should go down. It sounds like a W2 would be appropriate for wages, but if you use management fees and a 1099-Misc, that is also common if appropriate.

 

Your income, or management fees, derived from the partnership could get run through your own single-owner S-Corp to save on self-employment taxes, but I doubt this would be worth it unless you were also managing other properties and were darn sure you weren't properly considered an employee of the partnership.

 

Thank you for your question.

 

Customer: replied 4 years ago.
I appreciate your time and expertise. I am a little unclear on this.

Are you saying that I could deduct my fees for managing the properties and cutting the grass if I'm issued a 1099-MISC or W2? It doesn't make a difference that I am a partner (owner) in the LLC.

Is there anything else I need to file to use these deductions for the LLC (income for me)? Could you also please refer me to a tax publication for making these deductions?

I would get a tax deduction for the LLC (which goes to my personal tax return) in this scenario, but I would have to pay higher personal taxes. Do you think there is any monetary benefit in deducting "my fees" since the income goes right to my personal tax return and both are taxed there?


Expert:  BK-CPA replied 4 years ago.

The deduction is easy... just record it on the 1065.

 

The W2 and/or 1099-Misc is appropriate for someone that is working for / contracting with a partnership, S-Corp, C-Corp, etc., even if 100% owned in the case of a corporation. I personally give myself a W2 each year as a shareholder employee of my 100% S-Corporation, even though all the other income flows through to me too. Why? Employment taxes and, in the case of states, employers' unemployment taxes as well.

 

Remember, you recognize income while the company takes a deduction, so the overall effect is a wash from the IRS point of view, income to you, and a deduction for your partner(s), so long as it is done in an arms' length transaction and not a tax avoidance scheme...

 



Edited by BK-CPA on 6/3/2010 at 3:14 AM EST
Customer: replied 4 years ago.
This is the part that's confusing:

From what we discussed, residential real estate businesses do not pay extra self employment and social security tax.

I would get a tax deduction for the LLC (which goes to my personal tax return) in this scenario, but I would have to pay higher personal taxes.   

Is their any benefit in using this deduction for my own "fees" (property management and grass cutting)? There are several apartments in this LLC; so I am concerned about this.   
Expert:  BK-CPA replied 4 years ago.

There is no benefit to you (save more income for your work). The tax benefit goes to your partners and to the IRS. There is no choice in the matter.



Edited by BK-CPA on 6/3/2010 at 3:24 AM EST
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 808
Experience: Owner of a CPA firm
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