LLC - Disregarded entity or requires own filing?

Question

Brandon Hall, Amanda Han, @Jim Kennedy and any other real estate CPA's out there who would like to chime in.

I had always done my taxes myself with TurboTax. Last year I decided to use an accountant who has a sizeable real estate business since I plan on growing my business quite a bit over the next year or two and figured things will start to get a bit more complicated. Last year I waited far to long to do my taxes so I didn't really have a chance to question it when he said I need to file separate returns for my wife and I, and our two LLCs because disregarded entities only count for single member LLCs and since both my wife and I were on the LLC they were not single member.

For my attorney friends out there @Jessica Zolotorofe is there additional legal protections if I file the LLC separately rather than as a disregarded entity? It's worth it to me to pay the extra preparation and filing costs if there is.

Any chance you guys can weigh in on this? I'm starting to pull things together for this years taxes and get this done earlier this year than last year and am curious about this.

Thanks!

Dave Toelkes · Answer

@James Masotti,

When spouses are members of the LLC, the LLC is a partnership and your LLC income and expenses are reported on Form 1065 under the LLC's EIN.  For each partnership LLC, a schedule K-1 will provide the net LLC income (loss) that passes through to your personal income tax return.  You don't have the option of filing as a disregarded entity.  There is an exception to this general rule for spousal LLCs in community property states.

Did I misunderstand your question?

Cameron Skinner · Answer

@James Masotti,

@Dave Toelkes is correct in community property states spouses who are the only owners of a multi member LLC can automatically file as a disregarded entity. Other states it may depend on the State law if the LLC itself is treated as community property, which may very due to circumstances, for example if the LLC was formed before or after the marriage.  It may also require certain language in the organizational documents, so it really takes an attorney who specializes in these types of structures, so it may be easier to just make it a single member LLC.

Now every State is different, but in most cases as long as it is a "bonafide" business interest, there is usually not significantly more protection with a multi member LLC over a single member.

Hope this helps, good luck!

Dave Holland · Answer

@Mark S.

Yeah the nature of your business sort of makes it fall into a grey area.  For example with a retail store it is very clear, did you open your doors before 12/31 or not?

If you were my client, I could form an argument to say you either had or hadn't started operating the business and therefore I think you could do it either way. Even the tax code is not always black and white.

I would lean towards advising you to go ahead and claim the expenses. If you have the chance to lower your taxable income now, then you should. It would complicate your taxes some, but probably not to the extent to make it not worth it.

Lastly, even if you do want to claim the business expenses now, the March 15th deadline wouldn't apply to you.  As a single member LLC your business income just flows through to your personal return which is due April 18th.  The March 15th deadline is for entities that are required to file separate returns. The idea is that members/owners in those entities can get their K-1s earlier to get their personal returns done in April rather than extending.

Hope that helps.

James Miller · Answer

If you're in a community property state, then your husband-and-wife LLC can still be treated as a disregarded entity. Talk to your CPA. If you don't have a CPA, get one. They're really not much more expensive than a software solution and typically save a bunch more.

Mark S. · Answer

@Dave Holland, very much appreciated, as always.  I was planning to go ahead and deduct the expenses now, as I have/had the intention to do a reasonable deal as soon as possible.  If, say, I didn't open the business checking until 2017 because that's when I expected to do my first deal, I might feel differently.  Thanks, again.

Mark S. · Answer

@Dave Holland, yes, the expenses were (way) under $5K.  I made a one-time capital contribution in 2016 to the LLC business checking account, and paid both the attorney fees and had the credit union deduct the cost of the checks from this same account.

I have been in talks with the sponsor/syndicator, but we didn't actually do any deals together in 2016.  The LLC was created with the initial intention of being used to participate in syndication deals and have it be separate from me personally, primarily for asset protection purposes.

I'm not really sure where to draw the line in terms of what constitutes operating the business.  Was I able and willing to invest in a worthwhile deal with the LLC in 2016?  Yes.  Did I? No.  Hopefully this helps with your opinion on how this should be treated and whether I have to worry about March 15th deadline.

Dave Holland · Answer

@Mark S.

Thanks for the mention. What you've got is start up expenses, did you spend less than $5k? My guess would be yes but let me know if that's not the case because the answer would change slightly.

Generally speaking you can expense up to $5k in start up expenses in the tax year that you begin operating you business. So the question becomes did you start your business or just set it up? Sounds like you might have just set it up but weren't necessarily "open for business".

So in your case, based on my understanding of your situation you would deduct these expenses on your 2017 taxes once you begin actually operating your business.

Dave Toelkes · Answer

@Mark S.

Depends upon how your single member LLC has elected to be treated for tax purposes and your business activity.

A single member LLC can elect to be treated as a disregarded entity or as a corporation.  If your LLC tax treatment election was corporation, then you would file either Form 1120 or 1120-S as appropriate for your corporate election.

If your single member LLC elected to be treated as a disregarded entity, then no EIN was required unless you have employees.  If this is the case, then your LLC income and expenses are typically reported on your personal tax return, Schedule C (1040), under the same LLC EIN that you use for your payroll tax remittances.  For specific guidance for your unique circumstances, consult your own CPA.

Mark S. · Answer

What about a single-member LLC with its own FEIN?

LLC - Disregarded entity or requires own filing?

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