My wife and I have a two member LLC. We are filing a joint return. Can I report the LLC on a Schedule C or do I need to file a 1065?

[Bruce-M-]

We formed the LLC in November of TY 2016. The past three years we reported the home-based travel business on Schedule C.

[2015-Tax]

My wife and I live in CA.  Have two rental properties in the LLC.  Can I still report on a Sch C or do I have to file a 1065?

[DS30 · Accepted solution]

It depends on the state where the LLC is incorporated.

If you are in a non-community property state, you will need to file a Form 1065.

According to the IRS, if an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be "qualified joint ventures" (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses

If you are in a community property state ( Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin), you have a choice.

If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:

• Disregarded entity for federal tax purposes (a Schedule C filing), the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.
• Partnership for federal tax purposes (a Form 1065 filing), the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes.

A change in the reporting position will be treated for federal tax purposes as a conversion of the entity.

A business entity is a qualified entity if:

1. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
2. No person other than one or both spouses would be considered an owner for federal tax purposes; and
3. The business entity is not treated as a corporation under IRC §310.7701-2.

For more information see Single Member Limited Liability Companies

To file a Form 1065, you will need TurboTax Business, you can download a copy here

[tagteam]

"Can I report the LLC on a Schedule C or do I need to file a 1065?"

You need to file a 1065 unless you and your wife own the LLC as community property under the laws of a community property state, there are no other owners of the LLC, and the LLC is not treated as a corporation.

See Joint Ownership of LLC by Spouse in Community Property States: https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-compan...

[nwrider1]

My husband and I have an LLC and have been filling schedule C since it was formed in 2007. We added me as a 50% partner in 2010, we kept as filing two schedule C's. We now want to change to 1065 for several reasons, including the ability to show our guaranteed payments as income on our 1040 versus as expenses on schedule C  for loan reasons. If you use schedule C, this impacts ability to get a loan since it is looked as an expense by lender even though we pay ourselves generously and have paid ourselves exactly the same way for years using guaranteed payments and keeping business activities and finances 100% separate from personal. I had another partnership LLC where I filed 1065 with a non-spouse and have since dissolved, so I understand how to file 1065 and K1. However, the IRS seems confused on how to treat us since we are husband and wife and previously filed two separate schedule C's. It rejects us because we have been in existence with an EIN because we didn't file 1065 in the past or since forming. When we formed, we were only a single-member LLC. We do not have residency tied to any US state because we have lived 100% outside of the US for 5 years and file in each state we do business in. Do we have to initially paper file even though we've been e-filing under our EIN as a business?

[DavidS127]

While the business was a single-member LLC, it could qualify as a "disregarded entity" that files Schedule C.  Once the LLC added a second member, it defaulted to a partnership for tax purposes, and was required at that point to file a Form 1065 partnership tax return.

Essentially, you have been filing your tax returns as if you had a Qualifed Joint Venture.  Because the company was an LLC, however, you were not eligible to report your income as a qualified joint venture.

[Taxathrone]

Hey @DS30 (and/or @tagteam and @DavidS127) --  if my spouse and I wholly own an unincorporated LLC as community property in a community property state and treat the business as a sole proprietorship (so it can go on our joint return), do we file one Schedule C and SE in one of our names? One Schedule C and split Schedule SEs? Or split Schedule Cs and SEs? (Or does the IRS accept multiple ways?)

...Can't seem to find a clear IRS answer to this anywhere (as I also posted here)!

[tagteam]

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@Taxathrone wrote:

One Schedule C and split Schedule SEs? Or split Schedule Cs and SEs?

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If you make the election to treat the LLC as a disregarded entity, then you each file a Schedule C (and SE) according to your interests in the LLC.

See https://www.irs.gov/pub/irs-drop/rp-02-69.pdf

See also https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorpo...