Owning properties through an LLC - how to split the LLC expenses?

Question

I own some rental properties through my LLC. While most of the expenses can be attributed to a property and find their way to schedule E, I'm puzzled about the LLC expenses... In California its significant as we have the notorious "LLC fee", which is kindof a tax, but not really a tax, though paid as a tax to the tax board...

How would I report it on my taxes? Should I split the LLC expenses amongst the properties on schedule E equally and just write it down as an expense for the properties, or should I separate them to schedule C?

The reason I'm worried is because I'm a bit reluctant having schedule C with loss every year, I'm afraid it would be an audit trigger, and I'll have some explaining to do (not that I'm not entitled for the deduction, but just the hassle...). Does it make any sense at all, or should I just stop worrying and have a loss on my schedule C and all the LLC income (which is rental income) reported on schedule E?

The whole purpose of the LLC is to own the properties (I've been asking about it a while ago here), so there's not going to be any income to report on schedule C ever.

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To clarify, the "notorious LLC fee" is the $800 assessment under R&TC 17941, in addition the LLC's are charged income tax based on their income, but that's not an issue for me because my income is not attributed to California, the rentals are in a different state. Details here.

Answer 1

So it looks like @mbhunter's answer was the closest hit. What I got back from my CPA was this:

1. Fill the Schedule E, with expenses allocatable to properties allocated to the properties there.
2. Fill the Schedule C with all the expenses not allocatable to a specific property (including the LLC fee, tax preparation fee, etc).
3. On Schedule C add all the income received in gross receipts
4. On Schedule C deduct all the income reported on Schedule E as misc. deduction, and in the explanation write "Reported on Schedule E" - this should basically deduct all the income added in step (3) in my scenario where the LLC is only for holding properties.

Steps 3 and 4 basically address my concern of having Schedule C with no income.

According to my CPA that is the correct reporting scenario. I'm doing whatever she says:-) Reader be wary and verify with your own adviser.

Answer 2

You probably have a lot of depreciation to deduct. The government gets this back when you sell because it lowers the basis of each of your properties and increases the capital gain. So I wouldn't think that this is as great a concern as having a loss due to a lot of non-recoverable deductions (repairs, advertising, etc.).

Seems like the most straightforward thing to do is claim the LLC fee as being what it is: an expense of Littleadv Properties LLC.

If you get audited, it should go fine as long as everything else is in order.

Answer 3

As a (former) landlord, my accountant always suggested splitting such expenses evenly between the properties and claiming them on Schedule E under "Legal and other professional fees".