If you don’t completely understand your Schedule K-1, ask your S Corporation CPA to explain it. After all the IRS taxes you on the financial information it contains. For a free phone consult call (910) 399-2705.
S Corporation CPAs field calls on Form 8825 logistics. A common topic is the 1120-S Schedule K-1 that reports the rental property activity from Form 8825. So here’s some background and a few tips I’ve learned.
Federal tax Form 1120-S, US Income Tax Return for an S Corporation
Form 1120-S includes Form 8825 and Schedule K-1. So let’s say:
- You’re a real estate agent operating or electing to be taxed as an S Corporation.
- The same S Corporation owns some rental property.
- All your real estate agent transactions go on federal tax Form 1120-S.
- Your rental property activity goes on Form 8825 which becomes part of your S Corporation’s federal tax form 1120-S.
- If you only have rental property activity in the LLC or S Corporation, most of Form 1120-S is blank except for Form 8825.
Federal tax Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation
Form 8825 attaches to your annual Form 1120-S.
Federal tax Form Schedule K-1 - Shareholder’s Share of Current Year Income, Deductions, Credits, Other Items
Schedule K-1 reports the tax information in Form 1120-2 to the Shareholders. Lots of little quirks here about what goes where. The reporting of information from Form 8825 is one such quirk.
- The ordinary income from your real estate agent activity flows into Line 1 of Part III of Schedule K-1, Ordinary Business income (loss).
- The rental property income from your rental real estate property flows into Line 2 of Part III of Schedule K-1, Net rental real estate income (loss).
It seems that most tax software reports both the ordinary income and the rental property activity, from Form 8825, on a single Schedule K-1. But the IRS doesn’t like that. I think most rental property CPAs take the single Schedule K-1 the software generates and use it to report ordinary income and associated items. So Line 2 of Schedule K-1 is blank. Then we create a second Schedule K-1 within the software to report rental property activity on Line 2.
“You’re personally taxed on the financial info contained in federal tax form Schedule K-1. It’s prudent to check it carefully.”
- Gary Bode, S Corporation CPA and rental property accountant
Federal tax Form 1120-S has plenty of quirks. But I find most S Corporation clients understand it. And of course I answer any questions they might have. Most Landlords understand federal tax form 8825. But Schedule K-1 is different. The allocation of income and rental property activity to the Shareholders is only one issue. Have your S Corporation CPA explain Schedule K-1 if you don’t understand it. Why? The S Corporation is a pass through entity; Schedule K-1 contains the information the IRS taxes you on when it flows into Form 1040.
Our virtual office can handle your S Corporation’s Form 1120-S, Form 8825 and Schedule K-1 regardless of where you live.
I’m a rental property CPA and run my practice as an S Corporation. There’s rental property in my extended family. So I keep up on current issues with S Corporations and rental property. For a free phone consult call (910) 399-2705.
I am running a motel in California and wanted to create a LLC to report the income and expenses. I am thinking to report on form 8825 under commercial building code. Is that correct? If not, which form is correct.
Well Peter, an LLC can choose to be taxed as a single member LLC, a C Corporation, an S Corporation or a Partnership. Pro and cons of each are beyond the scope of a comment. Only S Corporations and Partnerships use Form 8825. SMLLC uses Schedule E. Hope that helps.