Conversion of Multi-Member LLC (Husband & Wife Only) to a Single Member LLC in a Community Property State

[Alex023]

My wife and I (husband) live in Texas, a community property state, and own a multi-member LLC, where we are the only members. The LLC has community property. We filed Form 1065 for 2022 and before as a partnership and then included the K-1 information in our joint return.

We are shifting from a partnership to a Single-Member LLC effective 01/01/2023. We are going to file Form 8832 before 12/31/2023 not to get a late filing penalty.

Our concern is what to do with Form 1065 and our personal return. Our 2022 1065 form was already filed without checking the Box G(2) to designate it as being final. 

Is it ok just to file a final blank 1065 for 2023 and start filing the business activities on a Schedule C with our  personal return or do we need to do something else/extra?

[Anonymous_]

I will page @Rick19744 but I suspect you will need to file a final 1065 if you've been filing them throughout the course of the LLC's existence.

[Alex023]

Thank you for answering our question.

Our question is more specifically if we need to file an amended 1065 form for 2022 just to add to check the Box G(2) to make the return final or it is ok to file a blank 1065 form for 2023 assuming that the conversion of entity is effective 1/1/2023. In other words, if the conversion date is 1/1/2023, is a partnership considered to exist as of 1/1/2023?

[Anonymous_]

Yes, if that is the date the LLC terminated, then it was in existence in the 2023 tax year. 

[Rick19744 · Accepted solution]

Some comments related to your questions:

• When the LLC was formed, in a community property state as stated in the facts, you had the option at that point in time to either file as if the entity was a single member LLC (with two owners) or file a partnership tax return since the entity is "technically" a multi-member LLC.  You elected to file as a partnership; and filed form 1065.
• Any deviation from this requires following the formality of an entity conversion; liquidation in your case.
• As a result, I agree with @Anonymous_ in that you need to file a final form 1065 for 2023.  Make sure the 1065 indicates final as well as both K-1's.
  • There are a number of technical issues that result when a form 1065 (partnership) liquidates, however, since you are filing as husband and wife on a joint tax return, I would imagine most of these issues would not be applicable.  Don't have near sufficient facts, but just my guess.
• You do not need to file form 8832 as doing so will only complicate the matter with the IRS.  
• The EIN assigned to the LLC filing as a partnership will no longer be used.

[Rick19744]

I am going to modify my previous response when I indicated that most of the technical issues may not apply since you are MFJ.

The biggest issue would be the basis of the assets that are distributed in a liquidating distribution.

There are specific rules that dictate how the basis of those distributed assets are determined.

This may require a visit with a tax professional, but once again, we have limited facts so don't know the extent of the impact to your situation.