Deductions/depreciation for rental LLC with only rental income

[meccooll]

We have few rentals in an LLC taxed as partnership (1065). There are no other assets in the LLC and the only income is from rentals, which goes into Schedule K line 2 and gets passed through to member K1s. My question is, how to properly handle general deductions/depreciations which can't be attributed to any specific property. Like when we pay for tax software/prepare, computer services, yearly LLC renewal fees with the state, bank fees etc... ? We have been putting those charges directly under LLC on 1065 (Federal Taxes > Deductions screen)  and since there's no other ordinary income we always have Ordinary Business Loss. Now we got a business cell phone (and a line) which must be depreciated, but since we're showing net business loss there's nothing to deduct it against and TurboTax is just offering to carry it over (indefinitely)? We can depreciate it from a property (on 8825) but how do we pick which one? Or if we have say 20 properties do we really need to spread one cell phone depreciation into 20 equal pieces, what if some properties are net losses while others are profitable? Please advise. Thnx

[tagteam]

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@meccooll wrote:

....We have been putting those charges directly under LLC on 1065 (Federal Taxes > Deductions screen)...

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Those expenses should most likely be entered on Form 8825 and, for the most part, allocated to each property.

[meccooll]

Can you expand on that a bit. In particular, if all of LLCs activities and income come from rental activities on Sch K Line 2, thus there are no other ordinary income, are there any deductions/depreciations that can go directly on 1065 at all? Or should 1065 be always empty? And in case of say a $1000 cell phone for an LLC with 20 properties. Are you saying that it should be broken up in $50 chunks and that $50 should be separately depreciated for 7 years under 20 different 8825s? And a $100 tax software should be expended 20 times for $5 on each property? Did i understand you correctly?

[tagteam · Accepted solution]

Yes; virtually all of your deductions are not "ordinary business" deductions but deductions related to the LLC's portfolio of rental properties (i.e., the LLC would have no reason to exist beyond owning rental real estate).

The LLC can also use the de minimis safe harbor for items, other depreciable, such as the cell phone thereby deducting the entire amount in the tax year in which the item was purchased.

With respect to expenses, such as tax software, you can allocate or you can deduct the expense from the income of one property.

[Carl]

Like when we pay for tax software/prepare, computer services, yearly LLC renewal fees with the state, bank fees etc... ?

You allocate those expenses across all of the rentals. If there's note a specific spot in the rental expenses section that covers the expense, then you allocate as a miscellaneous expense across all rentals.

Now we got a business cell phone (and a line) which must be depreciated,

I seriously doubt you paid more than $2,500 for the cell phone. So the purchase price of the cell phone most certainly can be expensed. The monthly charges for the cell phone can also be expensed across all rentals as a utilities expense.

Since rental income appears to be your only source of income, I also question if you are "actively involved" in the rental activity. You may want to confer with a tax professional to see if that income qualifies as non-passive income if it provides more than 50% of your reportable income each year.  If rental income is "truely" you're only income, then you may run into problems on the tax front later down the road when you sell the property. That is, unless you plan to keep the property for the rest of your lives with it being passed on to heirs in your Last Will & Testament. But you should still confer with an estate planning professional.

[tagteam]

Real estate rental income/loss is always passive unless there is materially participation by a real estate professional or the real estate is held for resale to customers in the ordinary course of business.

The sole fact that the income may provide "more than 50% of reportable income each year" is irrelevant standing alone.

[meccooll]

Think i got it, but to make things crystal clear, to save the clicks, even when i use de minimis safe harbor on a cell phone i can just do it all under one randomly chosen property, and don't have to allocate it across all of them. Right?

Edit: And to follow up, since now i'm moving everything from "Deductions" to "Rental Real Estate" tab, doesn't look like there's a preset option for Meals there like under "Deductions" tab. Does that mean i manually have to add a category under a property and same rules apply? i.e. take 50% on meals from the book value?

[tagteam]

There's nothing preventing you from allocating to one property but it would be optimum if the expense was allocated among all of them (as well as more accurate).

You can add any additional expenses in the "Other" category.