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I am a sole proprietor, in business of real estate

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investments. I do hard money...
I am a sole proprietor, in business of real estate investments. I do hard money lending and investing limited partnerships. Therefore I file schedule C to report the interest on loans even though they are often reported to me as 1099-INT. I assume I’m doing this right because I have business expenses to offset some of that income.My question is, what about the K1 income? I could report that on my personal tax as passive income and avoid SE tax, however I also miss the advantage of a higher Schedule C income if I were to somehow report K1 gains in my schedule C. For example, a higher ceiling for SEP IRA contributions and for 2018 the 20% tax break. Can I report K1 income on my schedule C?
Submitted: 3 months ago.Category: Tax
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3/11/2018
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago
Fred Rook
Fred Rook, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 132
Experience: 20+ years as a Certified Public Accountant, including 19 years working in public accounting firms with extensive tax, audit, write-up and consulting experience.
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Hello, my name is ***** ***** I can assist you. Can you tell me if your business is formed as a single member LLC? If it is, then the correct treatment is reporting the business activity on your schedule C. A single member LLC is considered a "disregarded entity," which means for federal purposes, there is no separate tax filing for the business. That means no K1 income. Let me know if you have any follow up questions for me.

Regards,

Fred

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Customer reply replied 3 months ago
My business is a sole proprietor. . Not an LLC. In addition to my hard money lending, I also put money into 4 different real estate investments that report to me on a K1. However, my role and work is the same for those K1 investments as they are for all the rest of the work. So it seems odd to report that outside of the schedule C as if it isn’t my business, I’m a professional investor, but K1 seems to suggest it’s not a business income.
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

Ok that makes things a little clearer. First of all, the K1's will be reported outside of the schedule C. However, you would be subject to self-employment tax and the activity would not be considered passive if you materially participate in the entities that are giving you the K1's. Generally, if you are involved in the operations of the activity on a regular, continuous and substantial basis, the activity is not passive. There is an exception for material participation if you are participating as an investor (studying and reviewing the financial statements, preparing summaries or analyses of the finances or operations of the activity for the investor's own use, monitoring the activity in a nonmanagerial capacity, etc). Also if you are deemed a "real estate professional" and your activities are related in these entities, the activity would also not be passive. The IRS defines a real estate professional as any taxpayer that provides more than one-half of his or her of her total personal services in real property trades or businesses where more than 750 hours of service during the year is involved in real property trades or businesses. Let me know if this addresses your question.

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Customer reply replied 3 months ago
I qualify as a real estate professional. How are K1s reported on schedule C? Do I just add as “other income”? And how do I differentiate ST and LT cap gains?
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

They are not reported on schedule C. Depending on the software you are using, there is some input where you can tell the program that you are not a passive member. Also depending on your software, there are sections that will be specifically for LT and ST capital gains and losses (they should be categorized on your schedule 1099 B) that will be reported on Schedule D.

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Customer reply replied 3 months ago
Ok. So just to be clear, when I tell turbo tax these are not passive, they will increase my business income? This is the goal, so I can increase my SEP IRA, I’m limited to 25%, Will that be the result?
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

It will increase your self employment tax and your limit for your SEP IRA.

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Customer reply replied 3 months ago
I made a copy of my tax file, and changed the K1 to non passive. It didn’t change the SE tax or the SEP Max limit, it only showed up in 1040 line 17. This seems to me that it should have assumed the income in schedule C to impact SE and SEP IRA?
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

ok let me take a look at a couple of things - stand by

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Customer reply replied 3 months ago
I may be missing a more fundamental issue. I have 4 K1 investments and about 20 hard money loans, 95% of my time is for the hard money loans, and these are what are in my schedule C. I don’t spend much time on the 4 investments, I’m a small % owner in 3, and a management company runs all 4, I have no business input unless in a shareholder meeting. Perhaps the mistake I’m making is to think that any real estate investment is non passive because I’m a RE professional. Maybe some investments are indeed passive? In other words, is the non passive test on a case by case basis? Or are all my RE activities non passive?
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

If the investment is active then the income from that K1 is absolutely subject to self employment tax, so I would have to understand how you are coding the K1 input as active. Now, having said this, based on what you are telling me in the last post, these investments WOULD be passive. My fault - I should have been more clear - the exception for real estate professionals relates to rental properties.

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Customer reply replied 3 months ago
Wel... while awaiting your answer I studied my own question. If I read the Schedule E line 43 right, by being a real estate professional all K1 investments are non passive. It appears the IRS carved out that specific distinction. So confusing?.
Customer reply replied 3 months ago
Amber a simpler question, what line of schedule E is entered somewhere else to increase the amount allowed for a SEP IRA? Or to increase the amount subject to SE. maybe if I see that line I can trace from there. Thanks!
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

Be back in a few minutes......

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Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

To answer your first question, see pages E-3 and E-4. E-3 Says that you had to materially participate and page E-4 defines material participation.

https://www.irs.gov/pub/irs-pdf/i1040se.pdf

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Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

To answer your second question, in part II of the form, the activity would be recorded in the non-passive income and loss columns.

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Customer reply replied 3 months ago
Ok thx. But unfortunately TurboTax does not move figures in the non passive section of Section E to increase either SE tax or SEP IRA limits... not sure why or if maybe it isn’t supposed to. Seems strange though, if it truly is income from my business it should,,,,
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago
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Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 3 months ago

Hello. Just wanted to check in and see if you have any follow up questions for me. If finished, please take some time to rate my service. Thanks!!

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