Forums: Discussions for entrepreneurs and small business.

Hi there. I’m currently working with a real estate investment firm (LLC), which will acquire, reposition, and then resale distressed real estate.

Although I clearly thought to be on solid ground, I’m now confronted with the question how to treat/account for/allocate accumulated depreciation for the properties the LLC holds.

Naturally, I was looking at accumulated depreciation as both a P&L and Balance Sheet item. Following this line of thinking, I was convinced that accumulated depreciation should be expensed in the P&L statement and thus lessen the taxable income of the company.

Now, a colleague raised the concern that LLC’s are considered to be disregarded entities for tax purposes and thus, accumulated depreciation benefits need to be passed on as tax credits directly to the members of the LLC. She further argued that these tax credits from accumulated depreciation do not necessarily have to reflect the same ratio as the ownership interest a member has in the LLC. With other words, it would be conceivable that a member who owns merely a 10% of the LLC could receive 50%+ of these tax credits provided that the partnership agreement provides for such a disproportionate allocation.

If the latter is true, wouldn’t the Tax Reform Act of 1986 eliminate these tax credits for the members again, since it curbs passive loss attributions to active income?


Any pointers would be greatly appreciated. Thanks.


Mark




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Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com

You friend is kind of right.  Single owner LLC`s can "choose" to be treatetd as disregarded entities.  They can also choose to be treated as a corporation.  It all depends on how the tax returns are filed.  To be treated as a corporation single member LLC`s should file form 8832. Multi-member LLC`s have to choose how to be taxed and can choose to be a partnership or corporation.   How you handle depreciation will depend on how the LLC has elected to be treated tax-wise.  But generally LLC  tax attributes pass throught to the members of the LLC.

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Rives CPA PLLC Certified Public Accountant Chartered Global Accountant