Business Return or Self Employed Joint Return

[comountainSK]

Can you help me determine if I should file a LLC business tax return or if I should add self employment income to my joint tax return?

We just started renting our home on Airbnb. We live there 6-7 months of the year. This year we made less than 2K in December. I was thinking if we claim that as self employed income on our joint return, all of the business deductions would give us a bigger bang for our buck than if we filled the small income as a standalone business return. We spent a lot of money in 2023 getting the house ready to rent and it won't really do much for us against a 2K Airbnb payout.

We did create an LLC but I can change our W9 with the sites to our personal info if we want them to file it against us directly instead of the business. I am thinking the write offs will be more useful if we file on our personal return rather than as a business. 

[Opus 17]

Normally, a rental is listed on schedule E, attached to your personal tax return.  To be an active business that would allow you to file on schedule C requires a significant amount of hands-on work by you.  @Carl   You still list your rental expenses on schedule E and pay tax on the net profit, if any.

You would never file a stand-alone business return unless you had an S-corp, a C-corp, an LLC that elected to be taxed as an S-corp, or an LLC with more than one member.  

[tagteam]

You would only report the rental income and expenses on Schedule C (self-employment) if you provided significant services to your renters.

See https://www.irs.gov/instructions/i1040se#en_US_2022_publink24332td0e1083

[comountainSK]

We did create an LLC but I can change our W9 with the sites to our personal info if we want them to file it against us directly instead of the business. I am thinking the write offs will be more useful if we file on our personal return rather than as a business. 

[tagteam]

If you are a married couple and do not hold the rental as community property in a community property state, you need to file a 1065 for the LLC.

[Opus 17]

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@comountainSK wrote:

We did create an LLC but I can change our W9 with the sites to our personal info if we want them to file it against us directly instead of the business. I am thinking the write offs will be more useful if we file on our personal return rather than as a business. 

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Because you created an LLC, you are obligated to file that way, even if it would be better not to.  (There is an exception if the only two members are spouses and you live in a community property state.)

You may want to seek expert help to unwind the LLC so you can file on schedule E.  Or at least, see an expert to discuss your options.  Some of the reasons people think that LLCs are better, aren't necessarily true.  

[Carl]

@Opus 17 yes. I paid off one of the three rentals in a lump payment with proceeds from an investment back in 2009-10. Without that Mortgage interest deduction it only took 2-3 years to use up all the suspended/carryover losses. Started showing an actual taxable profit in 2013-14. In 2016 I converted one of the rentals to personal use for a daughter & grand daughter to live in after the divorce. Unfortunately, the converted one wasn't the paid off one. So with two rentals since 2016 I still show a taxable profit every year. It's only about $2-3K a year, so nothing that bumps me to a higher tax bracket really. I'm currently in the 12% bracket and watch my income each year so I don't bump myself to the 22% bracket. That's one reason I'm closing my computer consulting business at the end of 2024.

[Carl]

Some of the reasons people think that LLCs are better, aren't necessarily true.

Agreed. Even if you file a 1065 as a multi-member LLC, all the information from the K-1's the LLC issues to each owner will still end up on page 2 of the SCH E on their personal 1040 tax return.  I myself can see no tax benefit for a married couple that files joint, to put a rental property into an LLC. Maybe it's a state tax thing? I wouldn't know since my state doesn't tax personal income. 

[tagteam]

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@Carl wrote:

......I myself can see no tax benefit for a married couple that files joint, to put a rental property into an LLC. Maybe it's a state tax thing?

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For some, particularly the HNW folks, it boils down to liability, whether that's induced by (legal/financial/tax) professionals or someone else. For others, it clearly involves the (faulty) rationale that creating an LLC somehow generates more and larger tax deductions ("write-offs").

[comountainSK]

@Opus 17 It looks like on the rental sites I can change the W9 to one of us personally and remove the W9 for the business. I am thinking we do that since it sounds like there isn't really a great reason to file it as a business. 

[comountainSK]

@tagteam we are married and it's our primary residence 6-7 months a year. Colorado is not a community property state. 

[Opus 17]

@comountainSK 

I don’t think it’s that simple.  For example, does the LLC own the property? If the LLC doesn’t own the property, then I don’t know how you would have reported the LLC as a business that was providing rental services. Unless the LLC was leasing the property from you, and then in turn, renting it to others. If the LLC does own the property, then you can’t unwind the situation simply by changing the W9.  

Then separately, if you formed an LLC, and you are now closing the LLC with no business activities, you may have state filing requirements, even if you don’t have a federal tax obligation.

Ultimately, no one on this board knows what you did, and I’m not entirely sure that you know what you did. I would like you to consult a professional.

[comountainSK]

@Opus 17 Good to know. No the LLC doesn't own the property. We created one to use for the booking sites and payments. I will consult a legal/tax professional. 

[tagteam]

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@comountainSK wrote:

.......No the LLC doesn't own the property. We created one to use for the booking sites and payments. I will consult a legal/tax professional. 

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You definitely need to consult with local legal counsel and/or a tax professional. If the property is not titled in the name of the LLC, you are getting none of any liability protection that would accrue.