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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?
Solution
ANSWERS:

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  • 1. 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? Solution ANSWERS: