Question: A married couple has operated a limited liability company (LLC) for several years. They are the only owners of the LLC and have always treated it as a partnership, filing Form 1065, U.S. Return of Partnership Income. They are not in a community property state. This past July, one spouse died. Should the 2023 partnership return cover all of 2023? If not, what should the LLC do?

Answer: No. The LLC will need to file Form 1065 from the first day of its tax year to the date of death. The surviving spouse will file a Schedule C, Profit or Loss from Business (Sole Proprietorship), for the remainder of the tax year. Because the taxpayers are not in a community property state, they were correct in filing Form 1065 and treating the LLC as a partnership.

The death of a partner in a two-person partnership causes a technical termination of the partnership for federal tax purposes if it results in only one partner remaining. If this occurs, the partnership’s tax year closes on the partner’s date of death (in this case, July 2023). The surviving partner will file Schedule C on their personal tax filing as a single-member LLC (SMLLC) disregarded entity for the remainder of the calendar year.

This conclusion would not be the case if the deceased partner’s estate, as the successor in interest, continues to share in the partnership’s profits or losses [Reg. §1.708-1(b)(1)(i)]. The partnership’s tax year does not close, and the partner’s distributive share of partnership income from the date of death through the end of the partnership tax year is reported on the tax return of the successor in interest [Reg. §1.706-1(c)(2)(ii)] If this is the case, the partnership would be issuing three Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc. One would be for the complete year on half (assuming the original partners were 50/50 owners) of the partnership results to the surviving spouse. The other half would be divided between one Schedule K-1 for the partner who passed away for the period Jan. 1 to the day before the date of death and a third Schedule K-1 from the date of death through the end of the year for the estate of the decedent issued to the estate’s employer identification number (EIN). When the estate period of administration ends, and assuming the surviving partner is the ultimate successor in interest, leaving only one partner, partnership treatment would end as of that date [§708(b)(1)].

Note: In either scenario, as described, the partnership’s EIN continues to be used either by the now SMLLC or as a multi-member LLC with the estate as the successor partner to the decedent.

As a business owner, finding strategies to reduce income tax while maximizing profits is crucial for long-term success. Tax professionals each have their own ways of mitigating taxes. That list is long and distinguished, and I am continually learning about them. This blog focuses on an established deduction, but with a twist. This one employs a strategy where the client purchases necessary equipment or vehicles that qualify under bonus depreciation or Section 179. As we all know, it can be used to offset qualified business income. It can also be used to (sometimes fully) offset capital gains. It is easy to see why it could be a potential strategy for some clients. However, several questions will arise. “I’m in a completely unrelated industry. How would I benefit from that?” or “Why would I trade tax liabilities for equipment I don’t need/use?” Here’s another, “Wouldn’t there be tax consequences later when I sell it?” You get the idea.

What if?

Fortunately, innovations have been developed and refined to make equipment rental more attractive and viable. Today, you can create an LLC, use leverage to purchase revenue-generating equipment through it and, for a fraction of what you would have paid in tax, create an income stream from a fleet of rental equipment. There is a growing list of professionals and business owners subscribing to this idea. Clients include physicians, CPAs, Wall Street traders and the list continues to grow. Imagine using $100,000 to potentially buy $1 million in equipment (leveraged transaction) that’s already being rented. The revenues are enough to pay all expenses including principal and interest, and still yield a healthy return. Further, there’s an agreed upon buyback of that equipment in year 5 that provides the return of capital plus enough to pay the remaining loan principal. The tax impact means you can potentially create a $1 million deduction against your income by using a fraction of that amount.

By far, this is a preferred way of doing business. If you owned a construction company, and are working on short-term projects, wouldn’t you want the option of renting the necessary equipment instead of having to buy it? This concept is easily understood when you look at companies like Airbnb (which helps people list their real estate for short-term rentals), Turo (a peer-to-peer platform for car owners who want to rent out their vehicles) and COOP (where businesses with idle trucks, vehicles, tractors, trailers and such can rent them out to other companies). Investors are taking fractional shares of ownership in airplanes for the purpose of renting them out. This idea has been around for years, and its appeal is only growing. This equipment rental concept successfully addresses staggering inefficiencies in a multi-billion-dollar industry.

How is this possible?

This idea successfully combines several factors:

1. An ongoing inventory of rental equipment that qualifies for bonus depreciation and Section 179. There are several hundred locations nationally where these vehicles and equipment are stored and showcased.
2. Leverage that allows investors to pay as little as 10% to 20% of the acquisition cost. This is already arranged for the investors. Financing affords investors the luxury of creating a much higher deduction than they could create with their own capital.
3. A nationwide base of construction, industrial and agricultural companies that continually rent equipment. This is projected to exceed $60 billion in 2024.
4. Interest income is paid to the investor on a monthly basis. One company has a target net rate of return of 18% on investor capital, paid in monthly increments. While this is not guaranteed, the company who designed this program has never fallen below that target since the program started eight years ago.
5. An agreement to market, maintain, insure and, if necessary, repair the equipment. This is all arranged for the investor.
6. An agreement to buy the equipment from the investor in future years where:
   • The investor receives the original capital
   • The investor receives enough to pay off the any remaining principal
   • There is a plan to eliminate depreciation recapture in the future

Important considerations

Before moving forward with this concept, make sure you understand what you’re getting into. This concept is most attractive to the highly taxed. There is a minimum amount of equipment purchased. Clients are typically making at least mid-six figures in income. Some are using this as a part of an exit strategy when selling assets.

Bonus depreciation is scheduled to end in December 2026. Currently, you can write off up to 80% in the year the equipment is bought, then use the next five years to use the remainder. If you buy equipment next year, the write-off is lower at 60%; in 2025, it goes down to 40%; then 20% thereafter.

You will be entering the equipment rental industry. To get your deduction, you will need to invest at least 100 hours of work in this business. This includes meetings, research, store visits, among other activities. Such activities should be documented and recorded. It is also advisable to create a separate LLC for this venture.

Remember that this will require debt. That is a risk. The arrangement calls for the investor to receive enough to pay principal and interest every month. The investor also receives enough to pay off the remaining principal during the equipment buy/back. There has not been a time when the companies that offer this program have fallen below target yields. Nevertheless, investors should consider if they have the wherewithal to service the debt if needed.

Typically, equipment is owned for five years, then sold back to the company. At that point, there will be depreciation recapture. Investors typically buy more equipment (using financing) and offset the recapture. While some have issues with this, paying the tax up front (with no planning) is still more expensive.

Also consider your liquidity. This is at least a five-year commitment, so reserve funds for current and future capital needs. You wouldn’t want to sell your rental equipment before the agreed upon buy/back period.

In conclusion

There is risk in any venture and, certainly, there are some to consider here. However, there are many redeeming features as well. Judge Learned Hand once said, “In America, there are two tax systems: one for the informed and one for the uninformed. Both are legal.” Section 179 and bonus depreciation are both well established in the IRC code. There are guidelines in place for this strategy to make sure it complies with tax law. Combined with leverage and the ability to rent the equipment to companies, clients can not only reduce or eliminate their income tax, but they can simultaneously build a fleet of rental equipment. You will likely be seeing more of this activity in years to come. If you would like to know more, contact us. If you would like more information, you can go to www.reignstormgroup.com.

Proposed regulations would extend current broker information reporting requirements to digital asset brokers beginning in 2025. Notably, they do not extend the reporting requirements to crypto miners or stakers. The proposed regulations were issued in response to the digital asset reporting requirements included in the 2021 Infrastructure Investment and Jobs Act.

The proposed regulations also contain detailed rules regarding how digital asset brokers are to determine amounts realized and basis, as well as backup withholding, for specified digital asset sales and exchanges. Finally, they would require reporting of digital assets used in the sale or purchase of real estate.

According to the proposed regulations, a broker for the purposes of the reporting rules in §6045 would include digital asset trading platforms, digital asset payment processors, certain digital asset hosted wallet providers and persons who regularly offer to redeem digital assets that they had created.

The proposed regulation would define a digital asset as: “any digital representation of value that is recorded on a cryptographically secured distributed ledger (or similar technology).”

The IRS specified that it would require broker reporting for all types of digital assets that fall within that definition.

Exclusions from the proposed reporting requirements would include:

• Broker reporting of the sale of securities and commodities that are excluded under current law, such as sales on behalf of certain exempt organizations or governments
• Persons who only provide distributed ledger validation services, including mining, staking, or selling hardware or licensing software that does not provide direct access to trading platforms
• Transactions where a customer receives new digital assets without disposing of something else in exchange

Brokers would be required to report gross proceeds from each sale of digital assets paid to a customer or credited to a customer account on Form 1099-DA, which is currently being developed by the IRS, and provide payee statements to customers.

The IRS is accepting public feedback on the proposed regulations. Written or electronic comments must be submitted by Oct. 30. A public hearing has been scheduled for 10 a.m. EDT on Nov. 7.

New digital asset reporting requirements for real estate sales

Real estate reporting persons would be required to report on dispositions of digital assets by buyers in exchange for real estate as well as the fair market value of digital assets received by sellers under the proposed regulations.

A real estate reporting person is the person responsible for closing the transaction or, if no such person exists, the mortgage lender, the transferor’s broker, the transferee’s broker or the person designated under treasury regulations. Real estate reporting persons are treated as brokers for the purposes or the reporting obligations included in §6045.

The proposed regulations also expand the information real estate reporting persons must report with respect to real estate transactions to include:

• Name and number of units the digital asset used to make payment
• Date and time the payment was made
• Transaction identification of the digital asset transfer
• Digital asset address into which the digital assets are transferred

Additionally, the proposed regulations expand the definition of gross proceeds that must be reported to include payments made using digital assets received by the real estate seller.