Do I need to file partnership return?

[CarolineL]

Hi Turbotax community,

I have a question on whether to file a return for general partnership formed between wife and husband. Here is our situation. We bought a property in late 2021 and spent some money to furnish and improve the property out of own personal bank account. Around the same time, we also formed a general partnership and got EIN in late 2021. We didn't list our airbnb until Feb. 2022 and only then it started to generate income (2022). All airbnb income go through partnership EIN.

My questions is whether we need to file a partnership return for the year of 2021 since we didn't generate any income & we would like to claim the expenses as our passive loss. Can we claim the loss through our personal tax return and carry forward the passive losses? Can we then offset the passive loss against passive 2022 income from the partnership when we file the 2022 partnership tax return, since partnership is a pass-through entity?

Thank you very much!

[Mike9241]

money spent to furnish and improve the property would not be deductible or depreciable until 2022.since it would seem you have no reportable income or deductions for 2021 a partnership return is not required.

now a warning about tax filing for AIRBNB

If you provided "substantial services" to your renters, then you're considered to have had an "active" role in earning Airbnb income. That active role indicates you should be classifying your Airbnb activity as a business subject to self-employment tax on net income and would not be passive.

[CarolineL]

Thanks Mike. Can I deduct expenses from 2021 on 2022 tax return? Is this only referring to start up costs (computers, equipment, home improvement, furniture, etc.) that needs to be capitalized and depreciated over time? How about other expenses I incurred to get ready for airbnb in 2021 e.g. auto/travel, repair, cleaning, and supplies (bed linens, paper towels etc)? 

[LeonardS]

As @Mike9241 pointed out "If you provided "substantial services" to your renters, then you're considered to have had an "active" role in earning Airbnb income."  in that case you would need to file  Schedule C Profit or Loss from Business.

The IRS has a provision for a Qualified Joint Venture (QJV).  "A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership.  You may want to consider this as an option rather than filing as a partnership.  Ref: https://Election for Married Couples Unincorporated Businesses.

If you need to file a Schedule C due to your active participation and  if you use the QJV option you will simplify your tax filing as you do not need to file a partnership return

@CarolineL

[CarolineL]

Thanks Leonard. Looks like I am not qualified for "substantial service" in 2021 since I didn't list my airbnb until Feb. 2022 (no service was provided to guest etc). In this case, what should I file in order to claim the expense I incurred in 2021 (bed linens, furniture etc)?

Thanks!

[ErnieS0]

It depends. What type of EIN did you apply for on your application. Did you say you were a sole proprietorship or partnership?

In general, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.

If you filed as a sole proprietorship and intend to report your 2022 income and expenses as self-employed (Schedule C) then you can file as self-employed in 2021, include your EIN number and deduct expenses.

As @Mike9241 said, it doesn't appear that you have any deductible expenses in 2021 since you were not in business.

[CarolineL]

@ErnieS0 thanks Ernie. Our EIN is for general partnership.  Looks like there are 2 proposed routes depending on whether we meet "substantial service" criteria mentioned by @Mike9241 :

1 - File schedule C in 2021 to claim expenses incurred in 2021 AND file schedule C in future years, if we qualify for "substantial service" in 2022 (no service was provided in 2021 since our listing didn't go live until 2022). We can do this through "Election for Married Couples Unincorporated Businesses" @LeonardS 

2- If we are not qualified for "substantial service", then we are not required to file schedule C; and we are not required to file partnership tax return in 2021 since we have no income in 2021 and will not be able to deduct any expenses since we were not in business in 2021

My question is that if we fall under #2, can we claim all expenses incurred in 2021 on 2022 partnership return including furniture, appliance and supplies (bed linens, paper towel etc) or only capitalized asset with depreciation (furniture, appliance)? Can we elect the de minimis safe harbor rule for capitalized asset under $2,500 to expense all upfront in 2022?

[ZoltanB45]

You are allowed to include the expenses incurred in tax year 2021 for tax year 2022, since the business was not running in 2021.

[CarolineL]

Thanks @ZoltanB45 

All of the expense incurred in 2021?

From what read, only up to $5,000 of business start­up and $5,000 of organizational costs from 2021 can be expensed the first year business starts running (2022). The the remaining can be amortized over a 180 ­month period. Additionally, business asset (e.g. furniture, appliance) can be depreciate when put in service upon business start or elect for bonus depreciation for new asset purchase or upon cost segregation study. 

Can you help clarify? Thanks!

[ThomasM125]

Since your rental activity did not commence until 2022, the operating expenses and organization costs in 2021 would be considered start-up costs like you mention, of which you can apply $5,000 in 2022 and the rest is amortized over fifteen years. The expensed amount in 2022 would be limited if the total was more than $50,000.

You are also correct in that you start depreciating the assets in 2022, the date they will be put into service.