Real Estate LLC Other Liability Not Allocating to Partners

[stacksholdings]

I have a small real estate LLC with 5 members.  I have input our security deposits as an other liability, it is showing on our 1065 pg 4 as a non recourse loan (showing red error).  The error says it is not allocating to the partners on the K1 which I see.  

[Anonymous_]

You might want to make this adjustment in Forms Mode. 

[stacksholdings]

I have tried making the adjustments in the form but it will not allow me to populate the field where it needs to be added.  The error message says something about a special allocation can be placed on it but I'm not able to find anything on what a special allocation code would be and what would be appropriate for a security deposit.  

[Anonymous_]

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@stacksholdings wrote:

...I'm not able to find anything on what a special allocation code would be and what would be appropriate for a security deposit.  

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Perhaps you can provide further details on how you entered this item and, possibly, reverse it.

[Carl]

Something caught my eye that I think needs to be clarified.

I have input our security deposits as an other liability,

"OUR" security deposits? LLC members don't make security deposits. They make capital contributions. If the LLC has rental real estate, the renter pays the security deposit. Not the owner(s). So maybe if you clarify exactly what "our" security deposit is referring to, that will help those trying to assist here, in better understanding your situation so they can better assist you.

Security deposits paid by the tenant to the LLC are not liabilities.  It's income. If/when the deposit is returned to the tenant, you'll record that as a payout in the tax year the deposit (or portion thereof) is returned to the tenant. That keeps the balance sheet straight.

[Anonymous_]

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@Carl wrote:

Security deposits paid by the tenant to the LLC are not liabilities.  It's income.

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That is simply not accurate. On a balance sheet, receipt of a security deposit results in a debit to an asset account (typically cash) and a credit to a liability account. When (if) the security deposit is returned, the accounts are reversed.

Security deposits are not included in income if they may be required to be returned to the tenant at the end of the lease.

See https://www.irs.gov/taxtopics/tc414

[stacksholdings]

Sorry for the poorly worded question.  When I said "our" I was revering to the LLC's tenants security deposit.  I do believe the proper accounting treatment is a liability for the security deposits received and my balance sheet ties right now.  

My only problem is getting the security deposits, which I input in the in Section L of the 1065 (pg 5), row 17, the error is showing in the "Partners and Liabilities Smart Worksheet section" row D.  Then my next error is in the Schedule K Reconciliation K-1 (K3) Liab Other - End which is not showing the allocation of the security deposits.  

I appreciate anyone trying to help on this.  

[JFJB]

Were you able to get your issue resolved? 

I have a similar situation and are looking for guidance on where to reflect a Tenant's Security Deposit on Schedule L of Form 1065.  I have tried Lines 17 and 20 of Schedule L but get the same error / warning about not allocating to partners.

[JoeKnows]

Wow...I know this is old but it's shocking how much you misinterpreted the question.  Security Deposits paid to the LLC ARE INDEED LIABILITIES TO THE LLC AND ARE RECOURSE DEBT TO THE PARTNERS BASIS.  Meaning If the partners take that money and spend it the Renter has the right to go after the partners for taking money that doesn't belong to them.  IT IS ABSOLUTELY NOT INCOME!!!! YOU HAVE NO IDEA WHAT YOU ARE WRITING ABOUT AND WOULD DO EVERYONE A GIANT FAVOR IF YOU JUST STOPPED.  I AM A CPA.  I REPEAT SECURITY DEPOSITS ARE NOT INCOME.  THEY BECOME INCOME ONLY IF DAMAGE OCCURS AND THE LANDLORD THEN KEEPS THE SECURITY DEPOSIT TO COVER DAMAGES OR UNPAID RENT.

[JoeKnows]

Truth is if you have no idea what you are doing you should hire a CPA.  These forums are full of people giving horribly incorrect advice and guidance.  It is a recourse liability that increases partner basis.