If this is your first year dealing with "something new" (such as your single member LLC) then I HIGHLY suggest you use the desktop version of Home & Biz that you physically install on your computer. It's much easier to navigate, and as a first time business owner you'll find the online version to be an absolute nightmare to navigate.
Also, you specifically and explicitely said "We have an LLC". That indicates more than one owner. If that's the case, then you really don't need to get the more expensive Home & Biz version. That's because you can't use any of the personal versions of TurboTax for any kind of business that has more than one owner.
Your jointly owned business will need to file IRS Form 1065 - Partnership Return which is totally and completely separate from your personal return. The partnership will issue each owner a K-1 which each owner will need for completing their personal 1040 tax return. IT does not matter that the owners are married to each other and filing joint. Note also that the partnership return is due by March 15th. Late fees after that dare are $200 per month, per owner. So submit it on the 16th, and you're automatically assessed a $400 late filing fee.
For a partnership/multi-member LLC I would ***HIGHLY*** recommend you seek professional help for the first year of business so that things are set up right in that first tax year. Do it wrong, and when it catches up to you the cost in the form of back taxes, interest and late fees can (and probably will) easily bankrupt your business before it even gets off the ground. I've also provided the below just to start the learning process for you, on all this stuff.
Sole Proprietorship –
This is a business with one owner, and only own owner. There are no other
investors or share holders. This type of business is considered a “disregarded
entity” by the IRS. All income and expenses for the business are reported on SCH C as a physical part of the owner’s
personal tax return. Again, a sole proprietorship has only own owner. Depending
on what state the business is in, registration is not required at the state
level. But it may be required at the county, town, or other level of government
below the state. For example, your county may require you to register and
obtain a county issued Occupational License, which authorizes you to conduct
business only within the jurisdiction of the authority that issued the
Occupational License. This is most often required when the county, city or
other authority below the state taxes personal income or imposes a tangible
property tax on business assets utilized to produce business income.
Single Member LLC -
This is a business with one owner, and only own owner. There are no other
investors or share holders. This type of business is considered a “disregarded
entity” by the IRS. All income and expenses for the business are reported on SCH C as a physical part of the owner’s
personal tax return. Again, a single member LLC has only own owner. This type
of business is required to be registered at the state level, weather that state
taxes personal income or not.
Additionally, this type of business may also be required to obtain an
Occupational License for the county(s), city(s) or other more localized
jurisdictions within that state, in which the business will be operating in.
Multi-Member LLC –
This is a business with more than one owner.
It’s also the exact same as a Partnership (for tax purposes) This type
of business also has to register at the state level, and may also be required
to obtain an Occupational License from more localized jurisdictions within the
state, in which that business will operate.
This type of business will file its own physically separate tax return
with the IRS (and state if applicable) referred to as a Partnership Return, on
IRS Form 1065. When completing the 1065 (using TurboTax) the business will
issue each individual owner a K-1 reporting the income (or loss) of each owner.
Each owner will use this K-1 to complete their personal return. So an owner
can’t even start their personal return, until after the 1065 Partnership Return
has been complete, filed, and all K-1’s issued to all owners.
In the community property states of Louisiana, Arizona, California, Texas, Washington, Idaho,
Nevada, New Mexico, and Wisconsin if you have a multi-member LLC where there
are only two owners, those two owners are legally married to each other, and
those two owners will be filing a joint 1040 tax return, they have the option
of splitting all business income and expenses down the middle and each partner
reporting their share of the business income/expenses on a separate SCH C for
each tax filer on the joint return. That means your joint 1040 return will have
two SCH C’s included with it – one for each owner. But this can present its own
problems in the event of divorce, separation. The issues can become even more
compounded upon the death of one of the owners. If that deceased owner’s will
does not pass all assets to the surviving partner, then that surviving partner
can find themselves in a tax hell, not to mention the problems that can arise
with the “new” owner or owners.
LLC “Like an S-Corp”
– For tax purposes only (and I reiterate: FOR TAX PURPOSES ONLY!!!!!) one
can elect to have the IRS treat their single member LLC or multi-member LLC
“like an S-Corp” ****FOR TAX PURPOSES ONLY!!!!!**** This means your business is treated like and
considered to be a physically separate taxable entity. This is accomplished by
filing IRS Form 8332 – Entity Classification Election. This allows you to act
as if your single member LLC or multi-member LLC is an S-Corp. But understand
that if you want the IRS to treat your LLC like an S-Corp, then the business
“must” act like an S-Corp, and follow all the laws, rules and regulations
required of an S-Corp by whichever state your LLC is registered in. All
business income and expenses is reported on IRS Form 1120-S – Income Tax Return
For An S-Corporation. The S-Corp will then issue each owner, investor and/or
shareholder a K-1 which they will need before they can even start their personal
tax return. Unlike a single member LLC
which is considered a disregarded entity for tax purposes, an LLC that has filed
form 8332 – Entity Classification Election
“is” considered and treated like a separately taxable entity.
S-Corp – This
type of business is registered at the state level and must conform to the laws,
rules, regulations and ordinances of that state which apply to an S-Corp. All
business income and expenses is reported on IRS Form 1120-S – Income Tax Return
For An S-Corp. The S-Corp will then
issue each owner, investor and/or shareholder a K-1 which they will need before
they can even start their personal tax return.
Unlike an LLC which is considered a disregarded entity for tax purposes,
an S-Corp “is” a separately taxable
entity, and therefore files its own physically separate tax return and issues
K-1’s to all owners, officers, investors and shareholders.
C-Corp - This
type of business is registered at the state level and must conform to the laws,
rules, regulations and ordinances of that state which apply to a C-Corp. All
business income and expenses is reported on IRS Form 1120 – Income Tax Return
For A C-Corp. The C-Corp will then issue
each owner, investor and/or shareholder a K-1 which they will need before they
can even start their personal tax return.
A C-Corp “is” a separately
taxable entity, and therefore files its own physically separate tax return and
issues K-1’s to all owners, officers, investors and shareholders.
Additional
Information For Rental Property Owners
Occasionally a rental property owner will be “convinced”
they need to put their rental property into an LLC (be it single owner or
multi-owner LLC) as a means of protecting themselves and their personal assets
from legal litigation should they ever be sued by a tenant. The property owner
is told the LLC gives them and their personal assets a “veil of protection”
from any legal litigation that may arise as the result of legal actions
perpetrated by a rental tenant. Nothing could be farther from the truth. If you check court records (even in your local
area) you’ll probably find numerous cases where a tenant sued their landlord and
the LLC provided practically no protection of the property owner’s assets. That
“veil of protection” supposedly offered by an LLC is so thin, even a new first
time lawyer has no problem piercing that veil and attacking the personal assets
of the property owner on behalf of the tenant. There are other problems and
issues with this too.
In order to legally transfer ownership of rental property to
an LLC, the owner must have the permission of the mortgage holder. No lender in
their right mind will give this permission either. Even if you think you can
refinance the property or “sell” it to your LLC, unless your LLC has the cash
on hand to pay for it in full, your LLC will never qualify for the mortgage
loan. The lender doesn’t want to risk your LLC going under (by filing
bankruptcy for example), and they lose money because of it. So I’m confident in
telling you, that’s not going to happen.
When you create an LLC for your rental property, it’s
generally understood that business income gets reported on SCH C as a part of
your personal tax return. However, a SCH C business produces “earned” income,
and a rental property produces “passive” income. What’s the difference?
Earned income is income which you have to do out and “do
something” in order to earn it. This income is subject to regular income tax,
and also an additional 12.6% self-employment tax. The SE tax is basically the
employer side of your social security and Medicare. But rental income is not
“earned” income, and therefore is not reported on SCH C. So if you create an
LLC for your rental property, then absolutely nothing concerning that rental
property will be reported on SCH C. Not one penny of rental income and not one
penny of rental expenses.
Rental income is “passive”. That’s because all you do with
rental property on a recurring basis is just “sit there” and collect the rent
every month. You are not “doing anything” to “earn” it on a recurring basis.
That’s why rental income is reported on SCH E. Rental income is subject to
regular tax, but is NOT subject to the additional self-employment tax. This
means that rental income DOES NOT COUNT for your social security account or
Medicare contributions.
SO if you create an LLC for your rental property, there are
two things that will NOT happen.
- You will not be able to “legally”
transfer ownership of the property from you, to the LLC unless you have a
really dumb lender.
- You will not report one penny of
rental income or one penny of rental expense on SCH C.
So in the end, you will be filing a zero income/expense SCH
C with your personal tax return.
Now let’s say you decide to file the 8832 to treat your LLC
like an S-Corp, and then you transfer ownership of the property to your LLC.
You can and will report your rental income on SCH E as a part of the 1120-S
Corporate Return, and you will also report the K-1 on SCH E as a part of your
personal tax return. But keep in mind that this is for ***TAX PURPOSES
ONLY!!!****. So if a tenant sues you, I seriously doubt the courts will
recognize your S-Corp, and I seriously doubt the court will recognize the
S-Corp as a physically separate owner of the property. Remember, that 8832
Entity Classification Election is for “TAX PURPOSES ONY”. It has no weight at
all for any and all other legal purposes – such as you being sued by a tenant.
SO if you want to do this (and it still makes no financial
sense) then form an actual S-Corp and transfer ownership of the property to the
S-Corp. More than likely the lender won’t allow the transfer. But you can sell
the property to the S-Corp if the S-Corp can qualify for a mortgage loan. Overall though, it’s still financially dumb
to do this. Here’s why I say that.
When you move out of your primary residence and convert it
to residential rental real estate, you have to convert your homeowner’s
insurance policy to a rental dwelling policy. Or if you buy the real estate as
rental property outright, then you have to obtain a rental dwelling policy at
that time. A rental dwelling policy
will, at a minimum, include $300,000 of liability coverage. For most that will
suffice. But if the property is in certain areas of the country you may want
more liability coverage. I have three rentals myself and have a total of
$1,000,000 of liability on each. It cost me less than an additional $100 a year
on the insurance for each property. So for me, it’s worth it. It’s also
significantly cheaper not only in money, but in time spent dealing with
corporate taxes and all that other additional paperwork crap.
One mistake I see quite often is that when an owner converts
their primary residence or 2nd home to rental property, and they
fail to update their insurance policy. This can bite when you have a claim. If
the property is insured as your primary residence, but you are using it as
rental property (which is other than it’s insured use) don’t be surprised when
the insurance company denies your claim, and you can’t find any lawyers that
will take your case. If it’s a case of
you being sued by a tenant, then to be honest and put it bluntly, you’re
screwed.
