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Saturday, February 16, 2013

Tax Time

Well, it's that time of year. Time to file US tax returns. That activity, plus a flurry of email correspondence with readers causes reflection of a number of ownership and administrative topics to be revisited. I will break that up in a few posts. For now, the tax return summary. We have three properties, each owned via a separate Limited Liability Partnership. What returns are required for the various authorities?

US Federal (IRS):
- Each LLP requires a 1065 Return with attached schedules: 8825 Rental Income/Expense Schedule; a 4562 Depreciation Schedule; B-1 (Information about Foreign Owners) Schedule; and a K-1 Schedule for each partner. The 1065 is the overall tax form for the LLP describing revenue and expenses: one item of which is Rental income. The 8825 schedule and supporting 4562 provide the detail of the Rental Income and Expenses. After the resulting profit is calculated, it is allocated to the partners and the K-1s report on that allocation. A copy of the K-1 is provided to the partner as input to his/her individual tax return, similar to a T3 or T5 in Canada.
- Each LLP requires a form 8804 (1 for the LLP), with supporting 8805 forms for each partner. These are also sent to the IRS, and in fact to the same address as the 1065...but sent separate from the 1065. Since foreign partners cannot be trusted to pay their tax due, the LLP is required to withold tax and submit it to the IRS on behalf of the partners. Partners then provide the calculation on their individual tax forms, and claim back any difference from the IRS. Anyway, form 8804 calculates the overall wittholding that the LLP owes the IRS on behalf of the partners, and the 8805 forms (one for each partner) show how the withholding is allocated to each partner. Form 8813 is a remittance form that indicate how much is on the attached cheque (check) being sent to the IRS. The partnership is supposed to do quarterly remittances using form 8813; and then at tax time the 8804/8805s summarize.

- Each LLP doing business in Arizona requires form AZ165 (submitted with a copy of the federal return attached) to be submitted to the Arizona tax authority.

So, 3 sets of documentation; 3 LLPs...3x3=9 mailings. Nice.

Wait, we're not finished. Now the partners need to file individual returns.
- Each individual files a 1040NR to the IRS; with attached K-1 and 8805 forms from each LLP; and
- Each individual files an AZ 140NR to the Arizona tax authority for income related to business in Arizona.
Different addresses of course. Two mailings x two partners = 4 mailings.

13 mailings in all!

We used the H&R Block Business software to create the LLP returns/schedules; and then just downloaded fillable PDFs for the individual 1040NR/140NR returns. The latter are pretty simple to fill out.

One material point: The LLPs can declare whether their real estate income will be treated as "passive" or "effectively connected" income. We declared ours to be Effectively Connected so that tax is on profit (revenue-costs); and also there is a $3800 Exemption on the partners' 1040NR returns which only applies to Effectively Connected income. As always, see your own tax professional for advice.

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