How to report 1099-INT interest income received by an LLC taxed as a disregarded entity?

[tagteam]

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@Taxathrone wrote:

@tagteam -- those sources are wrong? Well, dang...! Are you saying this as a CPA, too?

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Yes, those sources are wrong.

You really need to understand that most CPAs do not practice what I would term "retail taxation" (i.e., tax preparation and consulting for small business). In fact, most EAs know infinitely more about taxation than do most CPAs. In fact, you can get all the way through many MS in Accounting programs without taking more than one course in federal income taxation.

Frankly, and to be blunt, you can do what you feel is appropriate. If you want to pay self-employment tax on bank interest (which is not subject thereto), go right ahead.

[pnored]

@Taxathrone 

@tagteam 

Thanks for your further discussion on this matter!   I only had $13 dollars in interest in this manner in 2019.  I don't remember paying a self-employment tax from reporting this on a Schedule C. Maybe because it was such a small amount. This is a very shady area imo . I have heard good cases for reporting it in both areas.  At these point I don't know what the heck to do....

[tagteam]

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@pnored wrote:

.....I have heard good cases for reporting it in both areas.

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The best case is presented in the Schedule C instructions for Line 6.

 

Report on line 6 business income not reported elsewhere in Part I. Be sure to include amounts from the following.

• Finance reserve income.

• Scrap sales.

• Bad debts you recovered.

• Interest (such as on notes and accounts receivable).

• State gasoline or fuel tax refunds you received in 2020.

• Any amount of credit for biofuel claimed on line 2 of Form 6478.

• Any amount of credit for biodiesel and renewable diesel claimed on line 8 of Form 8864.

• Credit for federal tax paid on fuels claimed on your 2019 Form 1040 or Form 1040-SR.

• Prizes and awards related to your trade or business.

• Amounts you received in your trade or business as shown on Form 1099-PATR.

• Any amount of credit for qualified sick and family leave wages. See Form(s) 941 for 2020, lines 11b and 13c, and Form 944 for 2020, lines 8b and 10d.

• Other kinds of miscellaneous business income.

Note that the instructions for interest specifically do not mention bank account interest, interest from CDs, etc. but, rather, do mention interest on notes and accounts receivable which would be business income because the business is collecting interest on money it lent or credit it extended, not interest from investing business profits.

[taxet]

It good only at the paper. When i try to prepare tax use software. All interest income goes to line ordinary income. It is OK But also goes to line 14 self-employment income and need to pay additional  SE tax of 15.3%  That you will do?

[tagteam]

@taxet Do not enter the interest income as income from self-employment. 

[Anonymous]

I'm NOT a CPA, EA, or professional preparer, taking my best stab at this.  I'd agree with @tagteam that 1040/2b is the place for this with all your other interest, for reasons posted in more length here:

https://ttlc.intuit.com/community/taxes/discussion/re-i-opened-a-business-bank-account-and-received-...

In short:

• "Disregarded entity," really means "disregarded entity."  When the LLC is a single-member LLC being treated as a disregarded entity for personal income tax purposes, file as if the LLC doesn't exist, and you're simply filing as if you're a sole proprietor.  In the IRS' eyes, that's exactly what you are.
• Bank interest is not business income.  As @tagteam pointed out, it's different from examples "such as notes or accounts receivable" from the Schedule C instructions.
• If you read the instructions related to Schedule C and all other personal income tax forms, the IRS actually doesn't look for your LLC's EIN anywhere related to personal income tax documents including your return!  Even if your entity has an EIN, they actually instruct you not to use it, except in a few specific cases.
• The IRS is looking for 1099-INT bank interest income to be reported on Line 1040 / Line 2b.  The bank sends your 1099-INT with your EIN on it.  The IRS gets it.  The IRS sees that the EIN belongs to your SMLLC, and that SMLLC belongs to you, and only you.  The IRS will look for the income reported on that 1099-INT, on your 1040/2b (and Schedule B if required).  If it's not there, you'll probably get a letter asking why.

[pnored]

@Anonymous   Thank you for input on this issue. It is appreciated.  I filed my interest from a bank account used for an LLC on Schedule C last year. I didn't get a letter.  I have heard good rationale for both ways of reporting. The truth is....it is not spelled out clearly by the IRS. Im actually working on my taxes (got along way to go) as I type this.  I have not plans except to just make a decision when I get to that issue on my return. I suppose I have an extra reason to put on Schedule C since I did it that way last year.... who knows! Thanks again.

Parrish

[Anonymous]

Happy to help.  If I get other citations on it, I'll add. I tend to lean towards @tagteam's expertise, experience, and advice on the issue personally, but I can see why people might feel differently.

I do wish the IRS more clearly stated/emphasized that if bank interest doesn't come directly from business activities (such as loaning money), then it's not business income.

One note regarding "I don't remember paying a self-employment tax from reporting this on a Schedule C."  You did, because when it's included on Schedule C, all net income from Schedule C flows to the SE tax calculation.  So if it's on Schedule C, you're paying SE tax on it.

[Critter-3]

As an enrolled agent of 30 years and a teacher of the income tax classes for a big box store for 8 years I can with 100% assuredness that regular Bank interest never goes on the schedule c. A disregarded entity does not pay self-employment tax on passive income. The instructions about adding bond interest on a schedule c as other income is only used if the business is in the business of earning passive income.  Why anybody in their right minds would voluntarily report passive income on a self-employed schedule c form is beyond me. That would be like putting oranges in a crateful of apples, it is not right.

[DDT1345]

This situation applies to me. I have a single-member LLC that loans money to real estate investors. The LLC's primary source of income is the interest earned on those loans. I filed this income on the "Other Income" section of the Schedule C. For those of you who have said you filed this way last year and have not heard anything from the IRS, it's been my experience that it takes the IRS about 3 years to catch up to you. The reason I'm on this board right now posting about this is because I just recently got a letter from the IRS stating I under-reported for 2018 and that I need to pay. About 1 months ago I put all my documentation together showing I put this income on Schedule C and faxed that to the IRS. I have yet to hear back.

I've gone back into TurboTax 2018, 2019, and 2020 (I filed in Feb) and moved the income from Sch C to Sch B just to see what would happen. For 2018 my Fed taxes owed increased by $31 and my State taxes owed increased by $727. For 2019 my Fed taxes remained the same, $0 change. My state taxes owed increased by $1003. For 2020, my Fed taxes owed decreased by $324 (refund) and my State taxes increased by $264.

Without digging into the forms, I have absolutely no idea why this is happening. The only consistent thing is that I will owe more to NJ each year if I report on Sch B instead of Sch C.

If the IRS accepts my explanation for reporting the 2018 interest income on Sch C, I guess I'll have to do my taxes both ways each year to see which one nets me the biggest return. For 2020, it seems like I should file an amended return and swap the income from Sch C to Sch B, I'll net $140 between Fed (+$324) and State (-$284).

It seems that some who have posted here have been successful explaining this to the IRS. Have any of you been contacted by your States? Anyone have any idea what's happening here?

[AmyC]

Publication 3402 (03/2020), Taxation of Limited Liability | IRS states: 

LLCs Classified as Disregarded Entities

Income tax.

If an LLC has only one member and is classified as an entity disregarded as separate from its owner, its income, deductions, gains, losses, and credits are reported on the owner's income tax return. For example, if the owner of the LLC is an individual, the LLC's income and expenses would be reported on the following schedules filed with the owner's Form 1040:

• Schedule C, Profit or Loss from Business (Sole Proprietorship);

• Schedule E, Supplemental Income and Loss; or

• Schedule F, Profit or Loss From Farming.

@Critter-3 is correct

@DDT1345 a loan would be passive income. If you were doing big business, you would probably be an S-corp.

[tagteam]

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@AmyC wrote:

@DDT1345 a loan would be passive income. If you were doing big business, you would probably be an S-corp.

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I have to express my disagreement since it appears as if the sole source of income for @DDT1345's business is interest and it appears as if @DDT1345 is in the business of lending money to others.

As a result, the income from interest on the loans would be income from self-employment (earned income). In fact, the instructions for Schedule C indicate that interest from notes and accounts receivable are to be included on Line 6 (and it would have to be presumed that @DDT1345 holds some form of note when lending money).

See https://www.irs.gov/instructions/i1040sc#idm140094051206144

As a footnote, I believe the business structure (i.e., whether a sole proprietorship or S corporation) in no way dictates the size of the actual business. 

[Critter-3]

The original post asked about regular bank interest and a sole proprietor ... if a sole prop has a bank account that earns interest it is not entered on a Sch C ... it goes to the Sch B.   If the taxpayer simply holds mortgages on properties they have owned/sold  and does nothing to earn the interest then that also goes on the Sch B.

NOW ... if the business of the Sch C  is the making of loans  of  money then that is Sch C income and needs to reported as such. 

[tagteam]

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@Critter-3 wrote:

NOW ... if the business of the Sch C  is the making of loans  of  money then that is Sch C income and needs to reported as such. 

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I concur and @DDT1345 stated, in pertinent part:

" I have a single-member LLC that loans money to real estate investors. The LLC's primary source of income is the interest earned on those loans."

Thus, it certainly appears as if @DDT1345's business is making loans.

[DDT1345]

UPDATE:

I received a very simple letter from the IRS yesterday saying that "Your 2018 Form 1040 inquiry is closed. Amount due: $0.00".

So apparently they accepted my explanation of reporting the 1099-INTs on Schedule C. I imagine I will end up getting notices every year and will have to send in the same explanation and documentation, unless the IRS makes some sort of note on my account (I doubt that).

Thanks to those that responded with helpful comments. 

Kevin