Although investing in properties at Ark7 is a simple process, it can be confusing to figure out how to report taxes on your earnings. We want to clarify any confusion you may have, so here is an in-depth breakdown of Ark7’s tax report and a detailed explanation of how to file taxes on your earnings.
Each Ark7 property is owned as an individual series limited liability company or Series LLC for short. There are two ways to report taxes on a Series LLC. You can either report taxes as a C Corporation shareholder using a 1099-DIV form or report taxes as a business partnership member using a Schedule K-1 (Form 1065). While there are pros and cons to both tax reporting methods, Ark7 chooses to use the Schedule K-1 form.
Why Ark7 uses the Schedule K-1 form:
The Schedule K-1 has more significant tax benefits compared to the 1099-DIV. Business partnerships are “pass-through” entities. In other words, the Schedule K-1 allows the profits and losses of a business to stream through to its owners without paying corporate taxes. Using the Schedule K-1 rather than the 1099-DIV enables the IRS to determine exactly how much of the profits or losses you should file on your personal tax return.
Pros of the Schedule K-1 Form:
As an investor at Ark7, you share in the company’s profits and losses, which ensures you will only be taxed once for your earnings. Rather than filing a corporate tax and an income tax on your dividends, which is the case with the 1099-DIV form, you are only responsible for taxes based solely on the number of shares you own and the performance of those shares.
Moreover, losses carry over year-over-year, which means if your investment is in a loss position one year, your taxable income for the next year accounts for the previous year’s loss. For example, if you lost $500 one year and gained $1000 the following year, then your taxable income would be $500 rather than $1000 for that tax period. Losses carrying from year to year is a critical feature of the Schedule K-1 that prevents you from paying taxes on losses.
Qualified Business Income (QBI)
The QBI deduction is a tax deduction that allows sole proprietorships, partnerships, S Corporations, and LLCs to deduct as much as 20% of their qualified business income on taxes. According to the IRS, the Qualified Business Income (QBI) is defined as “the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business.”
The QBI eligibility requirements are lengthy, and it is a complicated process to determine what income qualifies. As a result, the QBI is a problematic tax benefit to be eligible for and receive. At Ark7, we want to ensure every co-investor’s earnings qualify for a QBI deduction, which is one of the primary reasons we choose to use the Schedule K-1 tax form.
We Plan to Simplify the Process in the Future:
We are currently working diligently to develop an Ark7 tax reporting format. The specific format is currently under development, and we plan to provide access to Ark7 users as soon as it is available.
For now, we will continue sharing guidance and helping current investors better understand how to file taxes on Ark7 earnings. We will be there every step of the way. If you have any specific questions or concerns, be sure to join our Slack Channel, or head over to the Ark7 Blog and Ark7 Support Page.