LLC - Rental Income vs. Ordinary Income

[kkletcher]

Hi. 

My husband and I own a property with his parents (mortgage and title under all four of our names). We rent this property out in FL. To keep things clear we created an LLC for banking issues. All of our airbnb payments and expenses flow through the LLC. (We have yet to take any income from the rental). 

My question is: 

1) Rental Income - Since the home is in our name and not the LLC - do we complete the form 8825? 

2) Where to place the income: Do we consider the rental income/payouts from Airbnb as LLC "gross receipts/sales" - ordinary income? Or do we place this as Schedule E - Part I - personal rental income? 

Part 2: If we put the rental income under Schedule E - personal, than do we put no income for the LLC  on Form 1065 (remember, the Airbnb payouts go to the LLC directly). 

THANKS! 

[kkletcher]

LLC is used for property management issues - this just keeps everything separate and clear. 

[Mike9241]

since the property is held by the 4 of you directly, the LLC is irrelevant (why do you even have it a joint a/c would probably accomplish the same thing)?  a partnership return is required. the question is do you provide services to the AIRBNB users 

According to the IRS: “Generally, Schedule C is used when you provide substantial services [i.e. hotel like services] in conjunction with the property

Do short-term rentals go on Schedule C?
Renting for Less than Seven Days When your average rental period is seven days or less per tenant, the IRS deems the activity to not be a rental activity under the passive activity rules. Because of this, many CPAs put short-term rental activities on Schedule C.

Is an Airbnb rental considered a business?

Typically since Airbnb requires active management, it is considered an active trade or business. This classification renders hosts as self-employed businesses. As a self-employed individual you are responsible for reporting and remitting your taxes on your own

thus  these activities of an AIRBNB would get reported on page 1 of form 1065 not form 8825

any net income  would be subject to self-employment tax

the partnership will issue each of you a k-1 which you use to report on your personal tax returns,

since you control the LLC, distributions from the partnership would be treated as if they had been made to each of you directly. (like the LLC was a management company) 

[Carl]

SCH C does not apply here, since this is a multi-member LLC or Partnership. Basically, a 1065 Multi-member LLC/Partnership return is completed and filed.

If the rental income is passive, it's reported on IRS Form 8825 by the multi-member LLC/Partnership. Then the MMLLC/Partnership will issue each member/partner a K-1 with the income/expense/gain/loss information on it. Each partner will enter the information from that K-1 into their personal 1040 tax return.

Take note that the filing deadline for the 1065 multi-member LLC/Partnership tax return is March 15. The late filing penalties are $205 per member for each month late. So file on or after March 16th and with four members you're looking at a late filing penalty of $820.

If the rental income qualifies as non-passive, the form 8825 will not be used for that specific non-passive activity.

Generally speaking, rental income is passive. However, with an AirB&B or VRBO property, if you provide services that are "directly beneficial to the tenant", then it could qualify as a non-passive activity.

[kkletcher]

Hello- and thank you! 

1) Form 8825- I was under the impression this form was only to be completed if the rental property is owned through the partnership? As this is considered passive income, if you placed this on the form 8825 and it counted as rental income on form 1065 then would the gross receipts/sales on form 1065 line 1 be “0” since the LLC only made rental income and no other income. 

[kkletcher]

@Carl 

[ColeenD3]

It is not just an issue of income but of services provided. It is not a straight rental. As @Mike9241 said:

When your average rental period is seven days or less per tenant, the IRS deems the activity to not be a rental activity under the passive activity rules. Because of this, many CPAs put short-term rental activities on Schedule C.

Is an Airbnb rental considered a business?

Typically since Airbnb requires active management, it is considered an active trade or business. This classification renders hosts as self-employed businesses.

. 

[kkletcher]

@ColeenD3 

Thank you for that information. 

This rental is average of 7 days or less - so if I'm understanding correctly, this wouldn't qualify as passive income. Therefore, no 8825 form would be needed. Here lies my question - if we don't include this on the 8825 form - do we include this "rental income" as ordinary business income for the LLC ?

I'm just trying to see: 

1) Form 8825 - is this required to be filled out 

2) If Form 8825 isn't required, then do we could this rental on our personal 1040 Schedule E (Part I) - or does the LLC count it as income on 1065 

[kkletcher]

@ColeenD3 

Also - can you file a schedule C if you're not a single member LLC? 

[Carl]

can you file a schedule C if you're not a single member LLC?

Typically, no. There is one exception.

If you live in a community property state and you have a 2 member LLC where both members are married to each other and filing a joint return, then each member can report their 50% on separate SCH C's as a part of their joint 1040 tax return.

For your case, since there are more than 2 members in the LLC, it doesn't matter if you live in a community property state or not. You can't do the SCH C on your separate 1040's.

[Carl]

Also understand that one of the requirements to qualify as a trade or business, is that you must provide services that are directly beneficial to the tenant. For example, if you're only providing services between tenants to prep the property for the next occupant, that's not providing services directly beneficial to the tenant.

Whereas if you're providing daily cleaning services while the property is occupied, then you are providing services to the tenant. Things like making the beds daily, cleaning the kitchen, preparing or providing a meal, etc.

But weather the activity qualifies as a "trade or business" or not, you still need to complete and file a 1065 return and issue all members a K-1. I think I mentioned above that the 1065 is due March 15th too.

[kkletcher]

@Carl 

Yes, thank you for the reminder. That's why I'm working  on this, as I am working to submit all paperwork on Monday the 14th. 

I believe the hardest thing here is just to determine if the rental income goes onto the LLC form 1065 or if we complete via personal Schedule E (it keeps mentioning schedule C - but not sure that is the correct form or not). Just difficult to determine the placement of the rental income. 

[Carl]

I believe the hardest thing here is just to determine if the rental income goes onto the LLC form 1065 or if we complete via personal Schedule E

I think you're over-thinking this, because of the lack of clarity in this thread. (I don't claim innocence on that either.)

It goes on the 1065 regardless. If it's passive, then the 8825 will be completed. Otherwise, there will not be an 8825 completed.

Understand that when the K-1 is issued, if the income is passive then all the data from the K_1 will end up on page 2 of each owner's individual SCH E. If the income is not passive, then it will end up elsewhere on the owner's 1040.

In other words, you the individual 1040 tax filer will not enter anything "directly" into the personal 1040 program concerning the property, that is not on the K-1. But you issue/get a K-1 no matter what.

For taxes, the only "real" difference between a partnership and a multi-member LLC, is the spelling. The partnership issues each owner/partner a K-1, regardless of the type of income received by the partnership.

Bottom line is, A 1065 needs to be completed and K-1's issued. End of story.

[tagteam]

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@Carl wrote:

It goes on the 1065 regardless. If it's passive, then the 8825 will be completed. Otherwise, there will not be an 8825 completed.

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Nonpassive income (loss) can also be reported on Form 8825 in certain instances, such as a self-rental or vacation rental with sufficient personal use. 

@AmeliesUncle 

[AmeliesUncle]

First thing you need to determine is if "services" are provided.  Maid service and meals are the most common, but there could be other factors that determine if "services" are provided.  For the rest of my comments, I will assume that "services" are NOT being provided.

It needs to be on a Partnership return (Form 1065):  The two options are Form 8825 (which is part of the 1065), or on page 1 of the 1065.  It is not an option to enter the rental on page 1 of Schedule E of your personal tax return.

• Although I personally think Form 8825 makes most sense, the Instructions for 8825 may make that approach questionable.
• If you report it on the 8825, I suspect when you enter the K-1 on your personal tax return that it will be difficult to tell the program it is NOT passive income.
• If you report it on page 1 of the 1065, it may be tricky to tell the program it is NOT subject to SE tax (it should not populate Box 14 of the K-1.

In either case, when you enter the K-1 on your personal tax return, the amounts will flow to page 2 of Schedule E on your personal tax return.