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S Corporation CPA explains the rental real estate tax reporting process for S Corporations | Form 1120S instructions

Form 8825 instructions. Form 8825. Landlord CPA. S Corporation CPA

I’ll explain the S Corporation real estate tax reporting process. Need a free consult with a S Corporation CPA? Call me; (910) 399-2705.

Here’s how the S Corporation rental real estate tax reporting process works for Form 1120S,  U.S. Income Tax Return for an S Corporation. Years ago I was flabbergasted the first time I saw an S Corporation rental property entity with nothing on page one. It took me a few minutes to see that most of the tax reporting occurred on Form 8825. The Form 1120S instructions don’t really help that much for rental property tax reporting. Mostly because S Corporations have a vast domain on what they can report. So I thought I would explain how all the rental real estate tax reporting works with an S corporation.

Form 8825Rental Real Estate Income and Expenses of a Partnership or an S Corporation 

Form 1120S uses Form 8825 to report rental income and expenses. Each Form 8825 can report up to four rental properties. But your tax software probably uses a Form 8825 worksheet for each rental property the S Corporation owns. I always use a spreadsheet and check the tax software figure. Most of Form 8825 is self-explanatory but reading the Form 8825 instructions is prudent.

Consistently reporting expenses in the correct category is important. For example, even though rental property insurance is deductible, classifying it as, say, repairs, skews Form 8825 and probably raises a red flag. Obviously, the required IRS categories on Form 8825 help the IRS identify questionable S Corporation 1120S(s) rental transactions.

I don’t work for the IRS, but most landlord CPAs would agree the IRS looks at your current 1120S and Form 8825(s) for both the current tax year (by itself for internal consistency) and compares them to other rental property S Corporations they feel are similar. But they, probably, compare your 1120S to your prior 1120S(s) too.

Here’s a technique that helps the Landlord track internal changes from year to year.

“Run a spreadsheet of your 8825 for all the tax years you file. Any deviation in a category is a potential red flag. You can fix it, or if it’s legitimate, provide some explanation and documentation with the current Form 1120S”
– Gary Bode, S Corporation CPA

Other sources of information besides the Form 1120S instructions and Form 8825 instructions

  • IRS Schedule E is almost exactly the same as Form 8825, so the Schedule E instructions would help.
  • Rental property CPAs use tax databases and your local college probably has a subscription to one.
  • IRS Publication 527, Residential Rental Property helps with rental property depreciation, a vital issue to your rental real estate 1120S and 8825(s).
  • Your local book store has annual books on rental real estate reporting.
  • Tax software help often supports common rental property tax reporting questions.

Unclaimed rental property depreciation

Rental property depreciation, a non cash expense, helps the landlord’s S Corporation lose money on Form 1120S while maintaining a positive cash flow. Nice trick. And depreciation is a major expense.

Depreciation is also the single biggest area of Form 1120S landlord confusion. Note the IRS punishes you for not taking rental property depreciation when the S Corporation sells the rental property. The rental property sale gets reported on Form 4797, Sales of Business Property. The Form 4797 instructions require you to “recapture” depreciation, whether you claimed it or not. So the landlord pays capital gains, via the Form 1120S’ Schedule K-1, that could have been deducted as depreciation on Form 8825 over the years.

“If you didn’t claim depreciation ask your landlord CPA about Form 3115, Application for Change in Accounting Method. If prepared according to the Form 3115 instructions, the IRS may allow you to now claim depreciation you didn’t take on earlier Form 8825(s).”
– Gary Bode, landlord CPA

Overhead on Form 8825, an example

Often the S Corporation has multiple rental properties on Form 1120S reported on Form 8825. Direct expenses go on Form 8825. Insurance and mortgage interest are two examples of direct expense. But what about your phone bill or office supplies? These aren’t direct expenses. So here’s what you do. You allocate indirect overhead to Form 8825 using some cost driver.

Let’s say the S Corporation has two rental properties. The first generated $50,000 of rent, and the second generated $25,000 of rent. The total phone expense was $1,000. $667 of phone expense would go on the $50,000 Form 8825 ([(50,000/75,000) x 1,000]and $333 would go on the Form 8825 with $25,000 of cancelled debt. Pretty easy to do in a spreadsheet.

Rental property cancelled debt

The recession is “over” but I still see S Corporation real estate cancelled debt reported on Form 1099-C, Cancellation of Debt, in 2018. But here’s unique aspect for S Corporation cancelled debt reporting. The S Corporation shareholder does not have cancelled debt income if one of the rental properties foreclosed. It stays at the corporate level and doesn’t get reported on the S Corporations Schedule K-1.

Legal protection for the landlord using Form 1120S

Let’s say a tenant sues the S Corporation. Theoretically the lawsuit can’t attach to your personal assets, only the S Corporation’s. The tenant’s lawyer will try to (pierce) the corporate veil and go after personal assets. So it’s important to run the S Corporation in the way the IRS dictates.

S Corporation dividends

S Corporation dividends don’t incur self employment taxes. This is one of the biggest tax loopholes existing today.

Do you need a S Corporation CPA to prepare your 1120S?

Maybe not. But the balance sheet in 1120S is tricky. While completing that is optional (usually), I like to complete it as it helps, in my opinion at least, prevent an audit.

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