How Should Husband/Wife LLC File

[Cosmic Zamboni]

State: Florida.

I've gotten conflicting advice on this. My wife and I formed an LLC for a small business we began working at last year. The question is how we have to file the tax return for the business. We would prefer to file it on Schedule C with our personal return. One advisor said we had to file it on a 1065 partnership tax return. Another says we can each file a schedule C sole proprietorship return for our portion of the business. Which is right?

[SChinFChin]

State: Florida.

I've gotten conflicting advice on this. My wife and I formed an LLC for a small business we began working at last year. The question is how we have to file the tax return for the business. We would prefer to file it on Schedule C with our personal return. One advisor said we had to file it on a 1065 partnership tax return. Another says we can each file a schedule C sole proprietorship return for our portion of the business. Which is right?

I had a husband/wife LLC in NY where we filed the annual 1065 partnership returns, for all the years we had the business.

What I was told was if it's a single member LLC, then, I can regard that as a "disregrard" entity, and file it via a schedule C. In certain community property states, a husband/wife can be considered a single member and can go schedule C.

I don't think FL is community property state though.

I have heard of people doing 2 scheule C's, but my CPA thought it safer to go the 1065 route, though it'll cost me the expense of another return and K1's, I figured better safe than sorry.

[Bubba Jimmy]

Once again, the IRS' instructions are more enlightening than an unnamed CPA's advice.

Take a look at the instructions for Schedule C here: http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

Take a look at page C-2, the section under "Exception - Qualified Joint Venture" in column 1.

"If you and your spouse each materially participate (see Material participation on page C-3) as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election and be treated as a qualified joint venture instead of a partnership."

By making this election, you and your wife would be able to file your portion of the business on a Schedule C. This is only true if you both are working the business. There is no reason I can see why you would want to file a 1065 partnership return, or why you should. It doesn't benefit you in any way and the IRS does not require it. If the business is incorporated or you have elected to be taxed as a corporation then this would not apply.

Be careful of the advice you get for free on message boards and make sure you compare it to what the actual IRS publications say. That includes advice from me or anyone else.

[Bubba Jimmy]

Upon further research from: http://www.irs.gov/businesses/small/...177376,00.html

I have to correct myself. It appears that an LLC would not qualify to be treated as a "qualified joint venture" according to this article at irs.gov. Therefore the 1065 would indeed be the only way to file unless you elected to be taxed as a corporation (which is what I'd do).

[SChinFChin]

Upon further research from: http://www.irs.gov/businesses/small/...177376,00.html

I have to correct myself. It appears that an LLC would not qualify to be treated as a "qualified joint venture" according to this article at irs.gov. Therefore the 1065 would indeed be the only way to file unless you elected to be taxed as a corporation (which is what I'd do).

Thanks for the helpful info.

I had researched this issue through the years, and read the above, and still found it very confusing, and my CPA advised to do the 1065 just to be safe. The phrase "just to be safe" usually means to me "I'm not sure".

Thought I mention I managed to send my 1065, and personal taxes in late once or twice, after the extension due dates, and received a letter from the IRS imposing a penalty on the late 1065's, but not the personal return.

After discussing with my CPA, we decided that I send a letter in blaming him, saying we thought the 1065 was not needed as it's a disregard entity, and if so, please disregard the 1065. But if it is needed, then please waive the penalty because my "un-named" CPA was thoroughly confused with the issue.

I have not heard back from the IRS, and this had been quite a few years already, so I beleive the IRS itself probably see it as a confusing issue. I see this rule went into effect in 2006?. My late returns were from before 2006.