While having a partner may make business sense, tax filing with partners can be complex and confusing. Paying taxes is painful. It’s tough to part ways with your hard-earned money when you have business expenses and maintenance to handle.
This article doesn’t include every tax break or loophole available. But it provides helpful, clarifying information about tax filing with partners in an LLC or Series LLC.
There are several advantages of selecting a series LLC as your business structure. It provides you with asset protection and anonymity, but there are also tax implications. Let’s check out some things you need to know about how tax filing with partners works with an LLC.
Remember, a series LLC is unique because it has a parent LLC and a series of children LLCs under it. Each entity in the structure provides its own layer of asset protection and anonymity and is protected against risk from other series. As a real estate investor, this allows you to segregate risk and hold several different properties without incurring the cost of setting up new business structures for them.
First, the IRS treats a series LLC as a single entity. Since it’s a pass-through entity, you can choose how you want to be taxed by the federal government. You have the option to choose between being taxed as a:
We will focus on the partnership or filing taxes with partners.
Filing taxes with partners depends on a few factors. But first, let’s talk about what it means to be a partner. The IRS considers any individual who owns an asset with another individual to be partners.
In most cases, partners must file a Form 1065 to report their income, gains, losses, deductions, and credits. An exception to that is if you are married to your partner. In the case of marriage, you can file Form 1065 and then do your taxes as you normally would.
There are some benefits of filing taxes with partners using Form 1065.
Filing taxes with partners using Form 1065 can benefit you and your partner. Recall that if you’re in a partnership, you’ll have to file a Form 1065 (unless you’re married to your partner). The 1065 (and Schedule K1) may be beneficial.
For instance, Form 1065 allows you to:
When you file Form 1065, you can move the tax liability of your business entity to the partners who have an interest in it. The form tracks your and your partner’s financial participation in the business on Schedule K1.
The 1065 and K1 protect your assets because the total income and expenses are a single line item. There aren’t separate spaces for your properties, just for your overall income and expenses.
Through the ordinary course of business operations, you may encounter expenses that do not directly tie to one of your properties. When you file with Form 1065, it’s easier to specify those expenses and claim them on your taxes.
Some examples of typical expenses you may claim on Form 1065 include the following:
Using Form 1065, you can enter the whole number as an expense, preventing messy records and bookkeeping.
Banks sometimes favor Schedule K1 income over Schedule E income when you apply for a loan. The bank may look at your Schedule K1 income and accept the number of expenses you claim.
On the other hand, if you supply your Schedule E income, banks will have predetermined vacancy credits, repairs, and maintenance that may lower your income. This may be especially harmful if you have new houses in your portfolio where you can get dinged for nonexistent expenses.
There are some considerations when filing Form 1065. For instance, it takes a long time to get a K1, so your taxes are due on March 15. If you need to file for an extension, you must submit it by September 15. Another issue is that a 1065 and K1 can be complicated, so you may need a professional to help you prepare the forms.
Filing taxes with partners through an LLC requires you to complete Form 1065 and Schedule K1. That rule applies to all partnerships unless you’re married to your partner. In that case, you can file a 1065 or in a different way.
There are some benefits to filing using Form 1065, including, but not limited to, its ability to:
It takes a long time, and it may be complicated to file taxes with partners using Form 1065, but we’re here to help. Take our TAX QUIZ to find out how we can best solve your tax needs.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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