Single Member LLC Schedule E 2013 Schedule C 2014

[Erick Garske]

I had changed accountants between 2013 and 2014. The new accountant is insisting that I need to file a schedule C instead of a schedule E. In my opinion, I thought that continuing to use a schedule E would be the way to go.

All the rental property ( three homes ) were quick claimed to my Califonia LLC. The are losses that need to be passed through to my personal income. Which is the more correct filing form? What is the maximum loss that may be passed through from the LLC to the personal return?

Thank you in advance for your replies.

[Linda Weygant]

@Brandon Hall

 - I wanted to circle back around to this discussion because it's been on my mind.  I hate not having clarity on a tax issue, so I brought this up at a colleague breakfast last Saturday where we all get together after April 15 and lament our issues that came up during the season.  Note that I don't do taxes for a living any more.  I do them for a very small handful of friends and family these days.  I brought up the issue of single member LLCs, rental real estate, schedule C and schedule E and I have to say it caused quite a bit of debate amongst the group.

There were about 40 CPAs present during the "official topics" discussion and the following issues surrounding this came up.

1 - if a landlord receives a 1099 for the rental income, there was some discussion about avoiding an IRS matching inquiry letter and so some CPAs would put the rental income on a Schedule C for the sole purpose of being able to report the income under the LLC EIN and so the matching criteria would be met. Others in the room said that the matching scenario for rental income, where box 1 (Rental Income) is indicated is not nearly as rigorous as for when box 7 is used (Misc Income) and that they did not feel that a mismatch between box 1 would necessarily kick off a letter from the IRS. Those that did think a letter might be kicked off indicated that they could clear up the issue with a very brief letter and it would be no trouble.

2 - there was a discussion of passive loss limitations and how, at certain income levels, a loss on a schedule C is essentially the same as a loss on a schedule E, so it didn't really matter how losses were presented.  For those of us who are concerned with uniformity and the likelihood of rental properties swinging drastically between losses and profits, those folks were sort of shouted down pretty quickly.  Clearly there is a need to report the same activity in the same (correct) manner, regardless of the actual tax outcome.  It was clear that a few of the folks in the room have become a bit lazy over the years.

3 - the topic of "rooming houses" vs housing rental was discussed.  The vast majority of those in the room feel that schedule C is best used only for rooming houses where significant additional services are included with house rental.  (This is consistent with your original message).

4 - I brought up the issue of the LLC liability issue - where a personal tax position (using schedule E) being used as a primary tool for piercing the corporate veil was used and the room primarily pooh-poohed such a concept and said there was clearly more to the story than what I was getting. However there were a small handful of tax attorneys in the room and they opined as how they could see that method having some merit in a perfect storm of scenarios, judges, plaintiffs and defendants. None of them had actually heard of it being used though. But personally I think attorneys will always allow for a possibility of *anything* occurring. I did not go back and ask my original source for my information as I suspect it is a very upsetting topic and I didn't really care to pick the scab off that wound.

So....

I wanted to thank you for bringing to my attention the issue between Schedule C and Schedule E. None of my clients own property within a single member LLC, so my misconception had no bearing on my clients as I've never reported rental income on a Schedule C, nor will I if the opportunity presents itself. So thanks for that. So for anybody reading my original post, please disregard that.

I also wanted to thank you for making me question the corporate veil piercing as well.  It didn't hold up to further scrutiny, so I take back my comment on that as well.