LLCs and tax filing

Ilyce Glink and Samuel J. Tamkin for the Chicago Tribune Real Estate Matters write:  Question: I heard you talking on the radio about limited liability companies (LLCs). I'm a CPA and thought you'd like to know that LLCs can take three different forms for tax filing. If it's a one-member LLC, it is what the IRS calls a disregarded entity, and the income and expenses are reported on Schedule C or E of a person's tax return -- so no extra tax return is needed. If the LLC has more than one member, it can be filed as a partnership or, if a form is completed the LLC may elect to file as a C corporation or make another election and file as an S corporation.

Answer: Thank you for that information. When Ilyce gets most of her calls about LLCs, they generally ask about forming an LLC to own real estate. In our column, we also generally deal with this issue from the perspective of how some people elect to hold title to their real estate investments. Your comment goes to the heart of another issue concerning LLCs: the federal tax issue.

Once you've decided to own real estate in an LLC, you will then need to decide how you want that LLC treated for federal income tax purposes. As you pointed out, if you are the only owner of the LLC, your situation might allow you to own various properties, and each of those properties might be owned by its own LLC. Since the IRS would ignore the LLC for tax purposes, the income and losses from the real estate properties would flow to that person's tax return. As you pointed out, that income might flow to Schedule C of a tax return. Schedule C is the form that deals with profits and losses from business.

Frequently, small business owners carry on their activities and for one reason or another they report that business activity on Schedule C.

On the other hand, IRS form Schedule E relates to supplemental income and losses. Depending on what income and losses you are reporting, you might need the assistance of a computer program or an accountant to help you when it comes to reporting income and losses from real estate to the IRS on a personal tax return.

Having said that, if the LLC has multiple owners -- generally more than just a husband and wife -- the IRS will need to treat that LLC as a separate entity with its own Tax Employer Identification Number. At this point, the owners of the LLC would have to decide whether they want the LLC to act more like a partnership or a corporation.

If the LLC wants to be treated like a partnership, it will file a tax return with the federal and state governments but the profits and losses will flow to the partners. That means that the LLC may not have income taxes to pay and any federal and state income taxes would be paid by the owners of the LLC on their personal tax returns. Here again, depending on who owns the LLC, how they participate in it, and other factors, those profits and losses may cause a personal income tax return to get quite complicated with a number of additional schedules to be completed.

Now, if the LLC wants to be treated as a corporation, it would pay all federal and state income taxes just as any other large corporation would. The LLC could also be treated as a Subchapter S corporation that would allow the owners to report profits and losses of the LLC in a similar manner as a partnership. However, Subchapter S corporations have greater restrictions on how many people can own the company, along with other limitations.

Essentially, many if not most owners of investment and commercial real estate will choose to own their real estate in LLCs and have the IRS treat the LLC as a partnership or as a disregarded entity.

Thanks for your comment. [end]

(Ilyce Glink is the creator of an 18-part webinar and ebook series called "The Intentional Investor: How to be wildly successful in real estate," as well as the author of many books on real estate. She also hosts the "Real Estate Minute," on her YouTube.com/expertrealestatetips channel. Contact Ilyce and Sam through her website,http://www.thinkglink.com.)