new LLC for rental property, no income in 2020, only expense -- do I need to file 1065 this year?

[Sandpiper21]

Hi, I searched past posts but didn't find a specific answer to this question.  I have done research elsewhere and got conflicting answers.

My wife and I created an LLC (as a partnership) in 2020.  We live in NY, but the LLC was organized in VA.  We entered into a contract to buy a vacation property at the end of 2020, but the closing is scheduled for end of Jan 2021.  There is obviously no income for LLC in 2020 -- since the LLC doesn't even own the property yet.  We had about $3000 expenses, including the LLC filing fee and Registered Agent fee,  2 house-hunting trips from NY to VA, and the fee we paid to the Home Inspector.

1. Do we need to file 1065 this year?  I have been told by some people that since the LLC theoretically has no activity, no filing is required this year.  

2. If we don't file this year, then when we file 1065 for the LLC for 2021, can we still claim the $3000 start-up expenses that was incurred in 2020?  

3. I will probably hire a CPA to do the tax next year when the LLC is actually generating income and the real deductions and depreciations start, but for 2020, I find it hard to justify paying $800~1000 to a CPA to file a 1065 with a couple of lines.  The actual tax benefit from deducting the $3000 start-up expense is going to be less than the CPA fee.  Am I being penny-wise and pound-foolish?  

4. Should I just buy the TT Business software and file 1065 myself, at least for 2020?  That will keep me safely on the good side of IRS, and avoid the high fee of a CPA.  I have used TT to file my 1040 for the last 10 years, so I assume TT Business should be relatively the same in terms of user-friendliness? 

Thanks.

Sandpiper21

[Anonymous_ · Accepted solution]

If your partnership neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes, the partnership is not required to file Form 1065.

See https://www.irs.gov/instructions/i1065#idm140672607577504

The partnership can deduct organizational and start-up expenses in the first tax year in which it is open for business. 

[Sandpiper21]

Tagteam, thank you for the reply.

Just to be clear, the $3000 start-up expenses we have incurred are NOT "treated as deductions or credits"?  

[Anonymous_]

You mentioned a vacation rental property in your original question.

Is this going to be a business in the sense that you will be providing short-term rentals with services provided to the renters?

Unless you have an active trade or business (or are investigating one), you cannot deduct start-up expenses per Section 195.

[Sandpiper21]

Tagteam,

This is a vacation rental property that will be managed by a Property Management company.  The LLC is effectively a landlord earning passive income.  Your point is since this is not "active" business, all the acquisition costs I have incurred should be rolled into the total cost basis of the property and be depreciated over time, instead of being deducted in the first year. 

You may be right, but to be honest, I don't care too much about that right now.  At this point, my biggest concern is to determine if I need to file 1065 for 2020.  Everything else can be sorted out by my CPA next year. 

So, given all that, I am coming back to my earlier question: these acquisition costs are not considered credits or deductions per IRS instructions, therefore I don't have to file 1065?  

[Mike9241]

this is direct quote from IRC section 195

"The term “start-up expenditure” means any amount—
(A)paid or incurred in connection with—
(i)investigating the creation or acquisition of an active trade or business, or
(ii)creating an active trade or business, or
(iii)any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business, "

therefore considering the amount, it would be deductible in the year you commenced the rental activities.

if in 2021 then you apparently have no deductible expenses and obviously no income so a return would not be required. 

if this activity is not engaged in for profit you would have a hobby that would severely limit what you could deduct and even which forms to use.