Question

John Schumer operates three entities that he owns 100% in the Providence, RI area. There are two limited liability companies (LLCs) and one S corporation. Each of the LLCs holds rental real estate. LLC 1 holds a six-story, multi-unit building. The minimum tenant stay there is 31 days. And there are mandatory housekeeping services provided on a bi-weekly basis. LLC 2 holds a single-family home rented on an annual basis. Both LLCs pay the S corporation a management fee. John is the sole employee of the S corporation, from which he takes a full-time salary for managing the two LLCs, where he materially participates. He is an architect. However, all his time is spent running the three businesses. He no longer performs architectural services.

1. Is the income from each flow-through entity eligible for the 20% flow-through deduction?

2. May the taxpayer deduct the mortgage interest he pays on his home as a rental activity business expense?

Answer 1

1. The income from each flow through entity is eligible for 20% deduction. John has two LLC’s & an s corporation. For an s corporation, the eligibility defined by IRS is that the owners must pay themselves a reasonable salary. In this case, we find that john gets salary from S Corporation for maintaining it. With respect to LLC’s, there are no reasonable compensation requirements like s corporations; it appears that all income which flows through the partnership is eligible for deduction.
2. The interest on mortgage can be taken as a deduction by the tax payer by deducting on schedule A (FORM 1040) if the deductions are itemized. However these expenses can’t be deducted if a standard deduction is taken.