My husband and I solely own an LLC. Do we need to file Form 8832 or does completing Sch C on 1040 automatically elect that our LLC is to be treated as disregarded entity?

My husband and I solely own an LLC. We filed 1065 return last year. We want the LLC to be treated as a disregarded entity this year. We are in California (a community property state). Do we need to file Form 8832 and attach to our 1040 return? Or does completing Schedule C on our 1040 automatically elect that our LLC is to be treated as disregarded entity?

1203

1 Best answer

Level 13

Jun 3, 2019 11:24:09 AM

Not sure that @TTDavid fully addressed your question.

As noted in TTDavid's response, the general rule is that a husband and wife owned LLC would require the filing of a partnership tax return form 1065; which is how you handled it previously.

There is an exception to the general rule for husband and wife owned LLC's in community property states. If you are the only owners, then you are able to report the activity on your 1040 Schedule C.

The question is now, how to make the change. Do you:

Just file a Schedule C this year and move forward, or
Do you file a form 1065 this year and mark it final and use the Schedule C next year

There are pros and cons for using a 1065 vs Schedule C. Using a 1065 provides for SS (earned income) to be allocated to both taxpayers. This could increase the SS tax paid, but could provide more SS income at a later date.

Should you decide to file the Sch C, some commentators believe a final form 1065 is not required based on the discussion in the form 1065 instructions regarding qualified joint ventures. Not filing a final 1065 could generate a notice from the IRS; which could be addressed in a response letter but not positive where the IRS will land on this question.

So bottom line, to be conservative, you may want to consider filing the 1065 this year and mark it final and close the loop with the IRS.

And finally, do not file the form 8832.

Level 13

Jun 3, 2019 11:24:09 AM

Not sure that @TTDavid fully addressed your question.

As noted in TTDavid's response, the general rule is that a husband and wife owned LLC would require the filing of a partnership tax return form 1065; which is how you handled it previously.

There is an exception to the general rule for husband and wife owned LLC's in community property states. If you are the only owners, then you are able to report the activity on your 1040 Schedule C.

The question is now, how to make the change. Do you:

Just file a Schedule C this year and move forward, or
Do you file a form 1065 this year and mark it final and use the Schedule C next year

So bottom line, to be conservative, you may want to consider filing the 1065 this year and mark it final and close the loop with the IRS.

And finally, do not file the form 8832.

Expert Alumni

Jun 3, 2019 11:24:11 AM

You do not want to file Form 8832.

An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a "qualified joint venture," whose only members are a married couple filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

A Business Owned and Operated by the Spouses through a Limited Liability Company Does Not Qualify for the Election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to married couple state law entities in community property states

Why sign in to the Community?

My husband and I solely own an LLC. Do we need to file Form 8832 or does completing Sch C on 1040 automatically elect that our LLC is to be treated as disregarded entity?