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Old 03-24-2013, 04:29 PM
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Accountable Plan Depreciation Reimbursement from LLC

My wife and I registered an LLC last year which is treated as a partnership for tax purposes (form 1065). We are using one room of our house (12%) only for the LLC passing the IRS home office tests. Also, we bought a car after the LLC was registered which we are using 23% for business based on the mileage log. Both the home and the vehicle are personal assets, on our names, not the company. We set up an accountable plan which reimbursed us last year for the business portion of the home expenses (including depreciation) as well as for the business portion of the car expenses (using the actual method including depreciation).

Now when trying to prepare the taxes for the LLC, we're having some doubts if the depreciation should have been included in the reimbursements or not... The initial thought was, since you can use standard method of mileage reimbursement (which includes depreciation), we could include it in both home office reimbursements, as well as the vehicle actual method. In our accounting software (Quickbooks), we treated the home office depreciation portion as "Office Expense" and the vehicle depreciation portion as "Vehicle Expense". Since the assets (home and car) are personal assets used partly for business, they were not included as company assets in the accounting software, only the expense reports reimbursements. However, at the end of the year, after the income and reimbursements, we have a NOL...

Currently using TurboTax Business to prepare the 1065 and importing from Quickbooks. Of course, all the reimbursements show as expenses and are included in the NOL. Since we have a NOL, I tried to fill out the Worksheet in Publication 587 for the home office deduction. Based on the worksheet, the depreciation and expenses won't be allowable and must be carried over in the next year. However, since they were reimbursed already, they became expenses for the LLC. Not sure what needs to be done now.

Was it correct to include depreciation in the accountable plan and reimbursements? If not, should we reimburse the LLC for the depreciation we took already? Since we took depreciation reimbursements (which became LLC expenses), do we need to include any depreciation forms with the 1065 (TurboTax does not seem to include anything, as if depreciation was not there at all and everything was expense)?



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Old 03-24-2013, 08:28 PM
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“Now when trying to prepare the taxes for the LLC, we're having some doubts if the depreciation should have been included in the reimbursements or not... The initial thought was, since you can use standard method of mileage reimbursement (which includes depreciation), we could include it in both home office reimbursements, as well as the vehicle actual method. In our accounting software (Quickbooks), we treated the home office depreciation portion as "Office Expense" and the vehicle depreciation portion as "Vehicle Expense". Since the assets (home and car) are personal assets used partly for business, they were not included as company assets in the accounting software, only the expense reports reimbursements.”==========> I assume that your LLC is NOT a joint venture(The IRS does allow a husband and wife who are co-owners of a business to make an election to be qualified as a joint venture, where each spouse reports business income on a Sch C rather than on a partnership Form 1065). Members of an LLC may deduct vehicle expenses if the use of the vehicle is directly related to the ordinary and normal operation of the business. Leased vehicles must be under the name of the LLC and directly involved in normal business operations.ALSO, generally, you figure the utility bills, and property taxes based on square footage of the house. You can also deduct depreciation. However, please bear in mind that, if you sell the house, you would have to treat the depreciation deduction on the house office as ordinary income in the year of sale by recapturing the unrecaptured depreciation UNDER unrecaptured depre rule; you can take the home office portion of your residence and deduct the cost over 39 years. You recover the cost when you sell or otherwise dispose of the property, So, when you sell your home you will need to "recapture" the depreciation you have recognized. If you dispose of the property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income.However, If you rent to yourself, the LLC would get a deduction for the rent and you would then report the rent as income on Sch E of 1040 on your return. From the IRS's perspective, the business owner would just be moving money from one pocket to the other. As you are claiming expenses for business use of your home as a partner, you do not need to use Form 8829. Instead complete the worksheet in Pub 587, Business Use Of Your Home and you must itemize deductions on Form 1040, Sch A to claim expenses for the business use of your home.


“ However, at the end of the year, after the income and reimbursements, we have a NOL...”==========> As said above.

“Currently using TurboTax Business to prepare the 1065 and importing from Quickbooks. Of course, all the reimbursements show as expenses and are included in the NOL.”========Correct
“ Since we have a NOL, I tried to fill out the Worksheet in Publication 587 for the home office deduction. Based on the worksheet, the depreciation and expenses won't be allowable and must be carried over in the next year. “=========>Since LLCs are favorites of small businesses, the home office deduction can provide a significant tax savings as expense for LLC. Since most LLCs are treated as partnerships, NOL do not really apply. Losses can be passed along to the LLC's members, who can generally apply those losses against their personal income. The amount of losses a member can claim on her personal return depends on her basis in the LLC, or the amount of after-tax investment she has made in the business.

“However, since they were reimbursed already, they became expenses for the LLC. Not sure what needs to be done now.“Was it correct to include depreciation in the accountable plan and reimbursements? If not, should we reimburse the LLC for the depreciation we took already? Since we took depreciation reimbursements (which became LLC expenses),”=====>As said, NOL of your LLC can be passed along to the LLC's members, who can generally apply those losses against their personal income. When you generate an NOL, you may amend the returns from the past two years and apply the losses against prior-year income. This would decrease the taxable income, which would decrease what you owe in taxes. The other alternative is to waive carrying back the NOL and carrying it forward and applying it toward the next 20 years of income.

“ do we need to include any depreciation forms with the 1065 (TurboTax does not seem to include anything, as if depreciation was not there at all and everything was expense)?”===========> You would need to complete the information about depreciation, since that amount figures into the gain or loss you had on the sale of the assets of the business; you should answer those questions because the IRS will reduce the tax basis of your assets by the amount of depreciation "allowed or allowable". That means they can write down the value of the assets you disposed of (thereby increasing the gain you have to report) regardless of whether or not you ever claimed the depreciation deduction. You need to contact the tax software vendor for professional technical advice.



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Old 03-25-2013, 09:12 PM
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Wnhough, thank you very much for your answers, this helps a lot!
To answer your first question, yes, we are a LLC treated as a regular parnership, not a joint venture, filling 1065, not Schedule C.

Please let me summarize if I understood right and correct me if I'm wrong:

Quote:
Originally Posted by Wnhough View Post
As you are claiming expenses for business use of your home as a partner, you do not need to use Form 8829. Instead complete the worksheet in Pub 587, Business Use Of Your Home and you must itemize deductions on Form 1040, Sch A to claim expenses for the business use of your home. Since LLCs are favorites of small businesses, the home office deduction can provide a significant tax savings as expense for LLC. Since most LLCs are treated as partnerships, NOL do not really apply. Losses can be passed along to the LLC's members, who can generally apply those losses against their personal income. The amount of losses a member can claim on her personal return depends on her basis in the LLC, or the amount of after-tax investment she has made in the business.
Yes, we completed the worksheet in Pub 587. So, although the worksheet says the expenses are unallowed based on the lack on income and must be carried over to the next year, since this is a partnership they can still be deducted as expenses this year (both the operating expenses and the depreciation), correct?

Quote:
Originally Posted by Wnhough View Post
You would need to complete the information about depreciation, since that amount figures into the gain or loss you had on the sale of the assets of the business; you should answer those questions because the IRS will reduce the tax basis of your assets by the amount of depreciation "allowed or allowable". That means they can write down the value of the assets you disposed of (thereby increasing the gain you have to report) regardless of whether or not you ever claimed the depreciation deduction. You need to contact the tax software vendor for professional technical advice.
We still need to attach form 4562 and include the business portion of the home office depreciated over 39 years and the business portion of the vehicle depreciated over 5 years, even if they are personal assets and not business assets, correct? In doing this, depreciation will be carried into the 1065 and we need to substract the reimbursed depreciation from the expenses, as they will be double counted otherwise, right?

Thanks again for your help!



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Old 03-25-2013, 10:24 PM
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“To answer your first question, yes, we are a LLC treated as a regular parnership, not a joint venture, filling 1065, not Schedule C.============> That is what I assumed previously; you are a MMLCC taxed as a PS filing 1065.
“Yes, we completed the worksheet in Pub 587. So, although the worksheet says the expenses are unallowed based on the lack on income and must be carried over to the next year, since this is a partnership they can still be deducted as expenses this year (both the operating expenses and the depreciation), correct?”=Correct. and you,as amemember of the LLC, must itemize deductions on Form 1040, Sch A to claim expenses for the business use of your home on yur return, NOT on Sch C as you , a member of LLC, never file Sch C. Sch SE or etc.ALSO, regarding NOL as said, it is passed thru to you and you need to apply NOL of the LLC on your return as NOL do not really apply to LLC ; you need to determine if you want to carry back the NOL to the prior 2 years or only to future years. Base this decision on what you anticipate your tax to be in the future years compared to the rates in the prior years. You can deduct the NOL in the carry back years if it is to your tax advantage to do so. If the NOL is not completely absorbed in the prior years, carry over the unused NOL to future years for 20 yeras. Alternatively, if you foresee being in a higher tax bracket in the subsequent year, you could elect to carry the entire NOL forward.You need to use Form 1045 to file your NOL carry back to the prior 2 years from the loss year. The advantage of using Form 1045 is that you will get your refund quicker than if you file amended return Forms 1040X for those years.
“We still need to attach form 4562 and include the business portion of the home office depreciated over 39 years and the business portion of the vehicle depreciated over 5 years, even if they are personal assets and not business assets, correct?”======>Correct; any incorporated business, including a LLC(even though LLC is NOT incorporated), is eligible for a number of vehicle tax deductions on cars that perform a necessary service to the company. You may have a choice of standard mileage rate or actual expenses, but either way, yes, the expenses can be deducted on the 1065 but only the biz portion either way.As a member of the LLC, you incur home office expenses due to business-related activities at your home, yourLLC can reimburse you for these expenses and deduct the amount it reimburses you from its taxes. These reimbursements need to be related to home office expenses that are regular and exclusive for the administrative and management activities of the business and/or for storing records, inventory or product supplies. This reimbursement is not part of your income. These expenses might include homeowners insurance, cleaning, maintenance, utilities, and telephone. If your LLC uses part of your home as an office or storage area, you can also deduct this expenses as home office expenses on Sch A of 1040. For incorporated entities,incl LLC, then the corporation/LLC can pay you "rent" for the use of your home office, and then you in turn pick this up as rental income on your personal return and take the deductions allowed there. Use IRS Form 1065 to report rent and utility expenses for your LLC ;you may deduct rent expense on line 13. Include rent expenses for office.

“ In doing this, depreciation will be carried into the 1065 and we need to substract the reimbursed depreciation from the expenses, as they will be double counted otherwise, right?”===========>Correct. I guess so to prevent double double count of the depre exp on 1065. On line 16a, You need to enter only the depreciation claimed on assets used in the biz. You need to enter on line 16b the depreciation included elsewhere on the return (for example, on page 1, line 2) that is attributable to assets used in the biz activities. You need to complete and attach Form 4562 only if the partnership/LLC placed property in service during the tax year or claims depreciation on any car or other listed property.

NOTE: if you are subset to sec 179 expense. Do not include any section 179 expense deduction on this line. This amount is not deducted by theLLC. Instead, it is passed through to the partners/members in box 12 of Sch K-1. Generally, the basis of a LLC’s(PS’s) section 179 property must be reduced to reflect the amount of section 179 expense elected by the partnership.


Last edited by Wnhough : 03-25-2013 at 10:36 PM.


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Old 03-26-2013, 07:07 PM
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Great, thanks again, this is really helpful!



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Old 03-26-2013, 08:23 PM
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" you,as amemember of the LLC, must itemize deductions on Form 1040, Sch A to claim expenses for the business use of your home on yur return"===>General partners can take a home office deduction as an unreimbursed partnership expense (UPE) on page 2 of the Sch E, if they are required to do so under the partnership agreement. Be sure to attach Form 8829, home office deduction. I mean The partnership agreement calls for the partners each
to provide their own office space. Each partner deducts qualified home
office expenses on Sch E.


Last edited by Wnhough : 03-26-2013 at 08:44 PM.


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Old 03-27-2013, 06:53 PM
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Quote:
Originally Posted by Wnhough View Post
General partners can take a home office deduction as an unreimbursed partnership expense (UPE) on page 2 of the Sch E, if they are required to do so under the partnership agreement. Be sure to attach Form 8829, home office deduction. I mean The partnership agreement calls for the partners each to provide their own office space. Each partner deducts qualified home office expenses on Sch E.
Since this was reimbursed under an accountable plan, there are no unreimbursed partnership expenses, so no UPE on Schedule E. Also, no rent pickup as income for the same reason, we do not charge any rent to the LLC, only reimburse the home office expenses. So it seems only 1065 with attached 4562 for depreciation is needed (listing both the home office portion and the vehicle portion), and everything seems to be flowing nicely through the Schedule K-1 to the personal return. Something else I could be missing?



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Old 03-27-2013, 08:11 PM
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Correct, basically, ass said, the LLC agreement would need to specify that the partner/member can be reimbursed for biz expenses through an accountable plan and then the LLC could reimburse him. then the LLC can reimburse them for the expenses and deduct the amount the LLC reimburses from its taxes. This reimbursement is not part of the member’s income. ONLY unreimbursed partner/member expenses should be claimed on Sch E on line 27 and should be labeled as "UPE." Typical partner expenses that may not be reimbursed by the partnership could be travel, including the use of the partner's automobile for business purposes or etc.



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