Choice of taxable entity

[peauff]

I have a client (home state of Utah) who created two LLC's with transactions in 2019.  The first LLC purchased a home in Colorado which was subsequently rented for part of the 2019 tax year.  This LLC was co-owned (50/50) by the taxpayer and his wife.  Because Colorado is not a community property state, my understanding is that we cannot file this rental transaction as a disregarded entity directly through the TP's 1040, we must file a separate return for this LLC.  Which then begs the question as to what taxable entity to elect.  My thought is to elect S Corp treatment, with pass through to the TP's personal return, however, no salaries were paid through this LLC, so my concern is that it may appear we are circumventing payment of SE taxes.

The second LLC was co-owned (50/50) by the taxpayer and his brother.  This LLC purchased a Colorado home in 2018 which was then re-sold in 2019 (flip sale).  Same concern as above; if we choose S-corp tax treatment, no salaries were paid to the owners through the LLC.

[sjrcpa]

Why not partnership?

[qbteachmt · Accepted solution]

This should not be S corp, because you know the issue, sort of: "My thought is to elect S Corp treatment, with pass through to the TP's personal return, however, no salaries were paid through this LLC, so my concern is that it may appear we are circumventing payment of SE taxes."

It's not SE taxes; it's Payroll. You don't have an employment condition. Also, you don't want to hold property in an S Corp, and it's a bit late to do so with the Property Titles, anyway. You didn't mention if the properties were properly owned by the LLC(s), and that is something to confirm.

Or, you want to run two S Corps and pay payroll as property management and as property development/remodel? Again, these are payroll operations, not SE. Payroll is a requirement for S Corps.

It would seem you likely have one or two 1065 entities; you will know more once you understand how the property is /was titled.

[abctax55]

It is virtually malpractice to put real property into a corporation....   

And entity elections are to be made when the business STARTS, not after the fact.  You can't just *pick* S-Corp later, unless the facts/circumstance show that the entity has actually been operating as a corporation.  The late election is to correct procedural issues, not to re-write history.

[peauff]

Thanks all, S-Corp will not be an option then.  I will need to verify title holders for the properties, as well as when these LLC's were registered (I believe they were held dormant prior to these transactions), but looks like Partnership returns would be the solution.