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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 355
Experience:  Former IRS Revenue Agent
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I have a vacation cabin rental business with 5 buildings. I

Customer Question

I have a vacation cabin rental business with 5 buildings. I wanted to know what credits and deductions are available in 2016 and if those credits and deductions could carry through the pass-through legal entity of the business to my personal tax return to reduce income from other businesses and W-2 income?
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Submitted: 4 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 4 months ago.

Dear Cabin,

It seems that you are interested in getting additional services. Let me answer to the degree I can using this platform.

A five-building business is huge, relatively speaking, for a single owner's business. You need to consult with an attorney in addition to CPA for your answer. A flow through entity does not block out your liabilities as good as a plain and simple corporation. If you expect your rental business income is going to offset your wage and other income, you much have some assets other than the 5 buildings. Then, to protect your assets from the liabilities from the cabin renting is more important than the flow through loss. An injured person can argue that your entity and you are really one much easier if it is flow through entity. I think.

Also, don't assume that you can enjoy loss. If your income is above a certain level, even if you have rental loss, you may not be able to take it and have to carry it over. If it is a pass-through, it can be through a K-1 from a Form 1120S or Form 1065. This part, you can and should sit down with a CPA in the state of your residence or the cabins.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 4 months ago.
Hello. My question centers, specifically, on the solar energy tax credits and section 179 deductions as they would relate to a LLC taxed as a partnership. Please provide your comments. Thank you. Jerry
Customer: replied 4 months ago.
What are the credits and section 179 deductions and are there any limitations or restrictions?
Expert:  Dr. Fiona Chen replied 4 months ago.

Dear Solar Energy Credit, (Jerry)

Your question now is totally different than the one you posted. I am glad that it is cleared up.

Purely speaking of deductions, in a Form 1065 flow through on rental properties, some of the credits can be directly flow through and some cannot. Section 179 is a flow through credit to make sure that a person will not get a lot of Section 179 in excess of the yearly limitation amount. It is flow through to the individual tax return to make sure that the total is within the limit. As to the solar energy tax credits, etc., each credit has its own regulation on how it is handled on the Form 1065 and on Form 1040. Don't try them at home. You have to have a professional CPA for consultation first before you complete your tax return.

It is good to have cabins with solar system. It sounds exciting. Every credit type, business or energy, has a lot of actual limitations and regulations. The flow through ones will have different effect on each taxpayer (partners) returns. So, they may be beneficial to some but not to the other.

Because you are in 2016 still, I highly recommend you to question/reexamine your entity form still with attorneys and CPAs. I once was told that forming a partnership is like marrying someone you don't know. Reporting in a partnership return can have the similar effect.

Regards,

Fiona Chen

Expert:  Dr. Fiona Chen replied 4 months ago.

Dear Solar Energy Credit,

Because I have not heard from you, I am thinking whether your question is how your credit can be taken from the Form 1065 to K-1, then, to your personal tax return of Form 1040. My basic advice is find a professional to do this. All credits have a lot of limitations. Since this is a partnership, the flow through effect is different on any and every partners. The Tax Master of the partnership needs to think through and talk through with everyone.

If you have five buildings, this is a relatively large business. If this is the first year in the business, to take on a solar penalty construction may or may not be the best investment for the first year. You need a professional to discuss with. There is another way to deal with these for you to discuss with your partners and your attorney and your accountant is to form a management company to manage this property for you all. Of course, this management company will have its own insurance, too.

Well, when you have a business of this size, the least worry should be how do I take a business credit on my 1040. All the alarms in my system come up when there are so many other issues involved.

Well, but I still want to address to your basic question. If that is your question. Where you will end up on the Form 1040 is Schedule E for Section 179 deduction. See Form 1065, sub form 8825 for rental income and expenses for partnership. https://www.irs.gov/pub/irs-pdf/f8825.pdf.

The form K-1 instruction for flowing through business credit to partners on K-1 is a good read, too. https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Form 3468 of the Form 1040 is a good starting place to read and understand. https://www.irs.gov/pub/irs-pdf/i3468.pdf

The whole process on how the business credit flow through individual tax return is a big and significant one.

Go with these readings to start with. Feel free to follow up with me for more questions.

Regards,

Fiona Chen

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