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Reviewing a return. In 2016 a CPA completed a personal

return containing a schedule C...
Reviewing a return. In 2016 a CPA completed a personal return containing a schedule C. There was a statement attached that stated the following:Statement Filed in Accordance with Rev. Proc. 2010-13 and Election to Group Activities Pursuant to Reg. 1.469-4 (e)The following activities have been grouped as a single activity for the first time during the current year.It names both LLC's. Owned by same owner. Owner purchase property it will work out of and pays the one business rent. So one business provides a service and the other business collects rental income. Both are LLC's but not taxes as an S-Corp. She files a sch C.Question, can there be two sch c and separate the activities after this election?
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Answered in 2 hours by:
3/25/2018
Mark Anderson
Mark Anderson, Tax Attorney
Category: Tax
Satisfied Customers: 622
Experience: Tax attorney and accountant
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You may need to file a a statement for regrouping:

https://www.thetaxadviser.com/issues/2013/feb/rowe-feb2013.html

Do you know why they were grouped together?

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Customer reply replied 1 month ago
I do not, and when asked, the taxpayer stated it was the CPA who filed her return. I am assuming it was for the sole purpose of the future losses as nonpassive income. But to my understanding, if this owner decides to close one LLC - service she would have to do the same for the other. If they were separate and never joined, she could still own the real estate and rent it out to someone else. Is this correct?How does one include the rental income and service income on one return if joined on a schedule c? Just as Gross income?

So do they have passive losses that they will be unable to take if you file two schedule Cs?

It looks like you would need to file a statement if you change it:

https://www.irs.gov/pub/irs-drop/rp-10-13.pdf

You would just group the income together and report it on the schedule C. You are just electing to report income and expenses together under federal law. Dissolving the LLC is under state law.

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This says you can't regroup unless the original grouping was in error:

http://wecpas4u.com/~samwheel/images/Activity%20Grouping%20Election%20II.pdf

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It also says:

A rental activity cannot be grouped with a trade or business activity unless either activity is insubstantial when compared to the other activity.

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Customer reply replied 1 month ago
That is what I thought. They are two different business. One is not like the other. One is a Real Estate Holding company to put the Owners property purchased that she will be using as a Place for Personal Services to the public. The Personal Services pays Rent to the Holding Company. These are two different entities. They were joined but they never Dissolved the other LLC with the state.The owner is active on her Holding company. She takes care of the repairs & maintenance and whatever else the property needs. She works out of the structure for her service business. She is not a real estate professional but is active in the holding company. I'm thinking if she separates it, the losses will be passive? Your thoughts.

Are there real estate losses over $25k? The CPA probably grouped it together to allow the losses.

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Customer reply replied 1 month ago
The CPA filed 2016 and it had minimal losses.2017 however, it's a different story.I thought the same, reason it grouped together, for future losses.
Yes, they are over 25K.

Here is some more info:

https://www.taxlawforchb.com/2016/02/1810/

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Maybe another expert can find a better answer. If you just left it, you could say the previous CPA did it. I am not sure what you should do.

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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,014
Experience: 35 years tax experience, including four years at a Big 4 firm.
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I'm PDtax. I see the first expert opted out. I can assist.

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It is possible to ungroup, or revoke that election. There is an exception in the Rev Proc 2010-13 that might apply, depending on your facts:

".07 Section 1.469-4(e)(2) provides that if it is determined that a taxpayer’s original grouping was clearly inappropriate or a material change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate, the taxpayer must regroup the activities and must comply with the disclosure requirements that the Commissioner may prescribe."

So, if your grouping was inappropriate, which you may be able to argue given one is a rental entity, and the other is a personal services company that would not be.

I could envision the rental LLC continuing to be passive, likely with the active participation eception, and the operating LLC for personal services be nonpassive.

This might give you the opportunity to revise the reporting entity to support this revision. Leave the rental LLC as a Schedule E reporting entity, and consider converting your services LLC to an S corp (with a wage). That would clarify not only the prior grouping, but set up the operating LLC with a wage and tax savings when it generated profits.

Thanks for asking at Just Answer. I hope my take on your question assists. If so, positive feedback, and a bonus if warranted, are appreciated. I'm PDtax.

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Customer reply replied 1 month ago
attach a statement with the return quoting Section 1.469-4(e)(2)

Cite that section, but additionally explain the reason for the split. I might lean toward the operating entity versus the passive one, which is a natural explanation for not lumping together for passive activity (the active business is clearly not a passive activity).

You might include excerpts from the business return, I like to use a Page 1 only, with 'AS ORIGINALLY FILED" written in black marker on the top of the page. A business return with a wage will support your request for a split.

I don't like to say that your previous tax advisor made an error, or misunderstood, unless they did or you have no other way to make this request. A simple statement of your position, with filed tax return support and statutory law relief, should do it.

Thanks again for using Just Answer. Positive feedback is appreciated. I'm PDtax.

PDtax
PDtax, Certified Public Accountant (CPA)
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Satisfied Customers: 5,014
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Customer reply replied 30 days ago
Thank you so much!
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