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Income from the leasing of cars...is it self employment

income? JA: What state is this...
Income from the leasing of cars...is it self employment income?
JA: What state is this in? And how old is the car?
Customer: It is a single member LLC in the business of long term car leasing
JA: Has anything been officially filed? If so, what?
Customer: No
JA: Anything else you want the lawyer to know before I connect you?
Customer: The net income is over $300K for 2016 Where on a 1040 would you report the income and expenses...1040C or Sched E -Page 1
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Answered in 10 minutes by:
10/9/2017
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 3,939
Experience: 3+ decades of varied tax industry exp. Tax Biz owner
Verified

Hello. Thank you for choosing this Q&A service for assistance. My name is Angela. I will be assisting you.

In some situations, a single member LLC would report their income/expenses on the Schedule E. However, since none of the information on the Schedule E apply to your situation, you would report the income and expenses on the Schedule C. SEE BELOW:

---------------------------------

Owner of Single-Member LLC

If a single-member LLC does not elect to be treated as a corporation, the LLC is a "disregarded entity," and the LLC's activities should be reflected on its owner's federal tax return. If the owner is an individual, the activities of the LLC will generally be reflected on:

An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.

If the single-member LLC is owned by a corporation or partnership, the LLC should be reflected on its owner's federal tax return as a division of the corporation or partnership.

REFERENCE SOURCE:

https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies

If you do not require further assistance with this matter, I ask that you take the time to scroll to the top of the page and select 3 or more stars to positively rate my response so that I can receive credit for assisting you. A 5 star rating is greatly appreciated.

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I forgot to answer your initial question. Yes, the income is self-employment income and subject to self employment tax.

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Customer reply replied 2 months ago
This is a single member LLC owned by an individual; that said, there are 3 issues:
1. Is the income from the leasing of cars "self employment income" subject to SE tax\
2. On the members tax return, does he report the income on Sched C or Sched E...it appears from your response that he reports on Sched C?
3. It is my belief that the taxpayer is engaged in a "passive activity" since he provides no services in connection with the leases..that said, can he apply this income against passive losses reported in Sched E from partnerships/S Corps?

I'm checking on this. I will get back to you shortly. Thank you for your patience.

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Based on the following, as you are a single member LLC, the income earned from the business is considered non-passive. SEE BELOW:

--------------------------

Passive Income
Passive income bluntly is income that would continue to generate if you died. Morbid. How about this? Passive income is income that would continue to generate if you decided to do nothing and sunbathe on some beach. That sounds better. Passive income includes rental income, royalties and income from businesses or investment partnerships / multi-member LLCs where you do not materially participate. (As you are a single member LLC, you are materially participating in the business in one way or another).

Passive income is also not subjected to self-employment taxes. But similar to portfolio income, it might be subject to the Net Investment Income tax. So, if you own a rental house, the income generated from the rental house is considered passive income. As a side note, taxpayers used to label themselves as Real Estate Professionals under IRS definition to allow passive losses to be deducted; now we are seeing the same label to avoid Net Investment Income tax on rental income.

Additionally, if you wrote a book and receive royalty checks, that income is also passive and not subjected to self-employment taxes. But, if you write several books and consider yourself a writer, then you are materially participating in your activity and your income is earned income. And Yes, you would pay self-employment taxes on that income.

REFERENCE SOURCE:

http://www.watsoncpagroup.com/kb/three-types-of-income_263.html

-------------------------------------

According to the IRS, if the taxpayer participates in a business activity on a regular, continuous and substantial basis, then the taxpayer materially participates in the business.

Based on the above information, I stand by my original answer that you would use the Schedule C.

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Additional Info:

--------------------------------

As the owner of a single-member limited liability company (SMLLC) (with the default tax classification of disregarded entity), you are not considered an employee and income you receive from your company is not considered a salary. Instead, just like a sole proprietor, the IRS considers you to be self-employed, and the income you receive is considered earnings from self-employment. As such, income you receive from your SMLLC is subject to federal self-employment tax.

REFERENCE SOURCE:

https://www.nolo.com/legal-encyclopedia/self-employment-taxes-owners-single-member-llcs.html

A positive rating is appreciated. Thank you in advance.

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I need to leave the computer for about an hour. If you require further assistance, I will contact you upon my return to the computer.

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Customer reply replied 2 months ago
Again, my belief is that this is a passive activity since it involves "rental income"
If this was a partnership or S Corp...wouldn't you consider this activity and its income "passive" per se?
Customer reply replied 2 months ago
Rental income without providing services is considered a "passive activity" regardless of the amount of time involved?

In brief, the issue is not the rental activity, it is the fact that you are single member LLC. In the eyes of the IRS, a single member LLC is considered a disregarded entity and reports their income and expenses on the Schedule C. It doesn't matter what activity the income is derived from. See below for yet another source:

Taxes and Other Expenses

Keeping up a single-member LLC is even easier and cheaper than maintaining a multiple-member one. Like a traditional LLC, a single-member LLC can elect to be taxed as a corporation. If you don’t make this election, however, your single-member LLC is treated as a “disregarded entity.” In other words, you won’t be required to file a separate tax return for your LLC. Instead, you can continue to report your self-employment income on Schedule C and save on tax preparation fees. You also won’t encounter any minimum tax fees for operating a single-member LLC. If you’re in a state with a high minimum tax fee for traditional LLCs — California’s minimum tax is a whopping $800 a year, for example — you can potentially save hundreds of dollars.

REFERENCE SOURCE:

https://quickbooks.intuit.com/r/structuring/the-single-member-llc-an-ideal-choice-for-solopreneurs/

The rental income that you are referring to relates to real estate. I know, it is frustrating, but the rules are the rules and I don't make them, nor can I change them.

S corporation, or partnership--different type of business entity...different rules.

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Customer reply replied 2 months ago
if I understand correctly, if this activity was conducted in an S corp, or a partnership, the income or loss would be considered" passive" per se but because, in this instance it is conducted by a disregarded entity, it is "active"?

Without looking at the S corp and partnership rules and regs, I could not say that this is the case for certain. What I can tell you for certain is that as a single member LLC (disregarded entity), you are considered to be actively participating in the business and you have to report the income on the Schedule C.

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Customer reply replied 2 months ago
since it is an active activity...I cannot apply passive losses against this income?

Passive losses can only be used to offset passive income. You can refer to IRS Pub 925 for more detailed information relating to passive activity.

Link to Form 925:

https://www.irs.gov/publications/p925

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Customer reply replied 2 months ago
My confusion is that in the instructions for schedule C:
Page 2...single member LLCs can report on...Sched E
Page 4...Rental of Personal Property is a passive activity unless it meets the 5 exceptions in the instructions to Form 8582 none of which applies to this taxpayer...this leads me to the belief that the TP is engaged in a passive activity which would permit the application of passive losses reported in Sch E against this income....and perhaps takes the income out of "self employment income?????

I tell you what, I have spent quite a bit of time on this matter, and it appears that I am spinning my wheels here, therefore I am going to opt out, release the question back into the queue and may be someone else can assist you. Have a good evening.

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emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3,271
Experience: IRS licensed Enrolled Agent and tax instructor
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Hi. Another expert here.

Angela is absolutely correct. Renting cars is not passive activity. Do not get confused by the description. Renting or leasing does not automatically mean is it passive income. Rental companies rent cars and their income is not considered passive. Hotel owners rent rooms (short term or long term) and their income is also not considered passive. Most large improvements stores have a department that rents equipment or tools and their income is also not considered passive income. Truly passive income is type of income that you receive without you involvement, like interest on your savings account or dividends from your investment. If your business requires your involvement (taking a car for a oil change, check up, wash or tell somebody to do it) it is not a passive income.

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Customer reply replied 2 months ago
One last point on your response so that I am clear...the TP is not renting cars, he is leasing cars on a long term (3 years) basis providing no services and appears not to fall into the 5 exceptions listed in Form 8582

There's no difference between leasing or renting. For tax purposes it is the same thing. So you are saying that he rents a car and for three years and he does not do any repairs, or maintenance, if the car breaks down he is not responsible for fixing it? He does not pay insurance or registration?

By the way 8582 applies to real estate rental activities AND income from Scorps and corporations. Leasing a car is not income from Scorp or corporation AND a car is not a real estate property. It does not apply to you.

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