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I own some rental properties through my LLC. While most of the expenses can be attributed to a property and find their way to schedule E, I'm puzzled about the LLC expenses... In California its significant as we have the notorious "LLC fee", which is kindof a tax, but not really a tax, though paid as a tax to the tax board...

How would I report it on my taxes? Should I split the LLC expenses amongst the properties on schedule E equally and just write it down as an expense for the properties, or should I separate them to schedule C?

The reason I'm worried is because I'm a bit reluctant having schedule C with loss every year, I'm afraid it would be an audit trigger, and I'll have some explaining to do (not that I'm not entitled for the deduction, but just the hassle...). Does it make any sense at all, or should I just stop worrying and have a loss on my schedule C and all the LLC income (which is rental income) reported on schedule E?

The whole purpose of the LLC is to own the properties (I've been asking about it a while ago here), so there's not going to be any income to report on schedule C ever.


To clarify, the "notorious LLC fee" is the $800 assessment under R&TC 17941, in addition the LLC's are charged income tax based on their income, but that's not an issue for me because my income is not attributed to California, the rentals are in a different state. Details here.

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You can't have a loss on Schedule C year after year, can you? I think the rule is it must be profitable at least two years out of five, else the IRS can disallow it all as a hobby expense and not a business activity at all. –  Dilip Sarwate May 1 '12 at 2:28
    
@DilipSarwate exactly, that's why I'm asking the question! I do have profits, but they're reported on schedule E, so what should I do now? –  littleadv May 1 '12 at 3:48
    
Couldn't you just pay a CPA to file the LLC taxes?! –  Marco Demaio Oct 16 '12 at 19:12
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@MarcoDemaio I could, and I probably will. –  littleadv Oct 16 '12 at 19:18

3 Answers 3

You probably have a lot of depreciation to deduct. The government gets this back when you sell because it lowers the basis of each of your properties and increases the capital gain. So I wouldn't think that this is as great a concern as having a loss due to a lot of non-recoverable deductions (repairs, advertising, etc.).

Seems like the most straightforward thing to do is claim the LLC fee as being what it is: an expense of Littleadv Properties LLC.

If you get audited, it should go fine as long as everything else is in order.

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So you're suggesting to keep it on schedule C? I'm not worried about losses on Schedule E, its the C that is bothering me. –  littleadv Apr 30 '12 at 23:50
    
What's the amount of the fee? My quick searching indicates that it's only $900 if you pull in between $250k and $500k, and nothing if it's less than $250k? Or maybe you're just raking it in? :) If your expenses are that close to your income then there'd be cause for concern? –  mbhunter May 1 '12 at 0:33
    
Its $800 flat fee, what you're talking about is the income tax. –  littleadv May 1 '12 at 0:34
    
Oh. Then I guess you're pretty close to breakeven on income vs. expenses, and this is the last straw? That might be a flag if it goes on too long because the business loses money regularly? (Not passing judgment, just asking ...) –  mbhunter May 1 '12 at 0:38
    
well, with depreciation I am pretty close to break even, but as long as my properties are rented out I'm in the black, so I do plan on having positive income even after paying this tax. The problem is that the income is reported on schedule E, while the tax is reported (currently at least) on schedule C, thus making the income on E a bit larger, but C will be with a loss, every year, just because of this tax. I don't have any earned income on this LLC, no matter how I compute, all the rental income is passive. I have another business, but that's a separate schedule C. –  littleadv May 1 '12 at 0:45

So it looks like @mbhunter's answer was the closest hit. What I got back from my CPA was this:

  1. Fill the Schedule E, with expenses allocatable to properties allocated to the properties there.
  2. Fill the Schedule C with all the expenses not allocatable to a specific property (including the LLC fee, tax preparation fee, etc).
  3. On Schedule C add all the income received in gross receipts
  4. On Schedule C deduct all the income reported on Schedule E as misc. deduction, and in the explanation write "Reported on Schedule E" - this should basically deduct all the income added in step (3) in my scenario where the LLC is only for holding properties.

Steps 3 and 4 basically address my concern of having Schedule C with no income.

According to my CPA that is the correct reporting scenario. I'm doing whatever she says:-) Reader be wary and verify with your own adviser.

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As a (former) landlord, my accountant always suggested splitting such expenses evenly between the properties and claiming them on Schedule E under "Legal and other professional fees".

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