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My question is to verify that what my accountant told me is…

For Lane only.My question is...
For Lane only.My question is to verify that what my accountant told me is correct.I own a property that I am renting out. The property is registered and owned by Maryland LLC partnership. I own 50% of the LLC and my wife the other 50%. We equally invested money to purchase the properties, and manage it ourselves. We are not qualified as professional since we spend about 200 hours a year to ménage the property.
My accountant told me that since we are “at risk investors” and active managers of the property, we are considered to the IRS to be Self Employed.
Accordingly as self-employed, we personally on our tax return need to pay Self Employment tax of about 16% of the net profit. Also, since we are Self Employed, we can contribute personally to SEP IRA up to about 20% of the net profit.
I think my accountant is correct, but like you opinion.Thanks
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Answered in 1 hour by:
3/10/2018
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,029
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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The expert you requested does not appear to be online. With your permission, I would like to answer your question. I am a licensed CPA who has been practicing tax for over 33 years. I have a masters in accounting and a masters in taxation. I also teach accounting and tax and a National University at the Masters level. I work for a large National CPA firm, and am the firm's expert in many areas.
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I do not believe that you're accountant is correct. A close reading of Internal Revenue code section 469 will show you that your activities do not meet the level required to be a real estate professional. 200 hours is far short of sufficient. There are numerous U.S. Tax Court cases which will back this up. If you would like, I can cite them when I go back to work tomorrow and have my research software available.Do you want to be classified as self-employed? Is that your goal? Because you would have to do something far different than simply managing a few properties.
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An at-risk classification is simply a determination as to whether or not you can deduct a loss. It does not classify you as self-employed or not. If you are not at risk, you are not allowed to deduct certain losses. But then, passive activity rules would also prohibits you from deducting certain losses.
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Customer reply replied 1 month ago
Sorry I was out of town to answer you.
My goal is to not pay Self Employment taxes, however I need to make it correctly. I searched on Google about this issue and found out that general manager of LLC can take profit from LLC through W2, or Guaranteed payment. W2 is out since I am not employed by the LCC. If I take guaranteed payment as active manager, I need to pay Self-employment tax. If I take guaranteed payment being “limited partner” I don’t need to pay self-employment tax. But the problem in taking guaranteed payment being “limited partner” is that I cannot be in any way classified as limited partner and accordingly must pay self-employment taxes.
I am using TurboTax to do the LLC 1065 tax return. As soon as I classify myself as general manager, TurboTax automatically insert self-employment income on line 14A of K1. However if I classify myself as limited partner, line 14A of K1 is blank.So the big question is, can I classify myself and my wife as limited partners? We spend at most 200 hours a year to collect rent, minor repair, and accounting.
Thanks
No, what you do is classify the activity as a passive activity. When you classify the activity itself as passive, everything you should flow through as not subject to self-employment tax.
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Customer reply replied 1 month ago
where on 1065 do I classify my activity as passive? Do I classify myself as general manager too?
Customer reply replied 1 month ago
there no place in Turbo Tax to classify activity as passive actvity
I am not a Turbo Tax expert, but I am good friends with one. Let me check and get back to you.I know that it is the activity, not the partnership classification, that makes it passive or not. And Rental real estate is definitely a passive activity. Just because you own it and manage it, you are still renting out real estate. That is a passive activity. The only way would be active is if you were classified as real estate professionals, and you are not.I will get back to you later this afternoon.
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Customer reply replied 1 month ago
Thank you.

Are you putting the income and deductions in as general? OR are you putting it in on the Form 8825 rental income page?

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It should be on the Form 8825 input page. That should trigger it as passive non-self-employment activities

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Customer reply replied 1 month ago
All entered on Form 8825 input page.
I am attaching the return as PDF file

I spoke with my friend, who is a TurboTax expert. She was actually on their help desk for a while. Here is what she said:

What the customer is saying is correct.

"As soon as I classify myself as general manager, TurboTax automatically insert self-employment income on line 14A of K1. However if I classify myself as limited partner, line 14A of K1 is blank."

I think he means General Partners, but you get the idea.

It has to do with how he's answering the interview questions.

See this: https://ttlc.intuit.com/questions/3261011-where-on-turbotax-business-is-the-materially-participate-question-i-selected-the-wrong-option-my-first-try-and-can-t-find-it

taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,029
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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taxmanrog and 87 other Tax Specialists are ready to help you
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Customer reply replied 1 month ago
Thank you for all your help. You have done more than I expected..
Her suggestion did not solve the problem. I selected General partner and not "Materially Participate" and still getting self-employment income on line 14A on K1.
I have to clear this problem with Turbo Tax directly. Now from all the readings, and your help, I know for sure that I should not pay self-employment tax.
Thank you, ***** ***** your help.
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taxmanrog
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