Self-employment income

[Strongsilence-CPA]

Rental income of an office space (a sublease) by a partnership (LLC with member-managers) without any of the partners or employees providing 'substantial' services to the sublessor is not self-employment income.  If I am right, I will have saved the partners significant taxes.

This partnership provides consulting services in a specialized field. 

It seems that the question of SE income turns on the question of whether the activity is a TOB. Since consulting is the primary activity, this sublease is not a TOB.

IRC 1401 is an area of the law that I should spend more time learning.

From CCH:

Rentals from Real Estate. Rents from real estate—as well as rents from personal property leased with the real estate—received by an individual who holds the property for investment are generally not included in net earnings from self-employment income. For example, rents from the operation of a mobile home park are not included in net earnings from self-employment. However, rents paid for services that are for the convenience of the tenants as opposed to services required to maintain the space rented to tenants in condition for occupancy are included in net earnings from self-employment if the services are substantial enough so that payment for them are clearly a material part of the rents paid by the tenants.

[BobKamman]

Draw us a picture.  The partnership rents office space -- and uses some of it?  or none of it?  Then it subleases to a tenant.  For less than the rent the partnership pays on the lease, or for the same amount, or for more?  

I would think the sublease income would first be used to reduce the rent deduction, which would increase the net consulting income.  

[TaxGuyBill]

Correct.

If the rental income is properly reported on Form 8825, then the software shouldn't be adding that income to Box 1 or 14 of the K-1.

[Strongsilence-CPA]

Hi Bob,

My client PTSP rents office space (several offices) and subleases one office. 

No substantial services are provided.  The PTSP pays for a light cleaning service (which is recovered by the rent.)

It was never reported on an 8825 (by me or the previous preparer) until the thought occurred to me this year that it might not be SE income.  

The amount isn't significant to them.  

I don't like reporting net amounts in general, and in the case of rent expense, a net amount won't match the amount on the 1099.

This client is one of my "meatier" clients with new tax issues and complex transactions. It seems that I 'discover' various tax aspects each year, such as this year when I dug deeper into IRC 1401 and rents.  I enjoy this process and it keeps me learning and growing as a CPA.

[Strongsilence-CPA]

Thank you TaxGuyBill.

[BobKamman]

@Strongsilence-CPA  "in the case of rent expense, a net amount won't match the amount on the 1099."

I don't know that IRS does any automated document matching for 1065's, but I'm trying to figure out what 1099 number would match what expense number.  Is the subtenant issuing them a 1099?  Are they issuing their landlord a 1099?

Are they making a profit on the sublease?  Say they are paying $20 a square foot for the space, and the subtenant is paying them $25.  Is the net rental income $5, or $25?  

Are you in a jurisdiction where rents are subject to sales tax?  Have they been paying it on the sublease income?  Sometimes there is matching at the state and local level, between returns showing rental income and returns showing rental sales tax.