Husband and Wife LLC (Home based Business) but I see Schedule C and single K-1 filled, how to fix?

[shishirdahal]

We have Husband and Wife run LLC (Home based Business). After filling all questions and data, when I see on the forms that are filled, I see that Schedule C (Sole proprietorship) and single K-1 filled, which does not look good to me. How do I correct this and file 2 K-1 for both husband and wife? Do I need Schedule C?

BTW, I live in WA state, which is Community Property State

[ScruffyCurmudgeon]

VERY CRITICAL QUESTION:  STATE OF RESIDENCE?

[ScruffyCurmudgeon]

@shishirdahal

So, as you are a resident of Washington State,  you live in a state with "Community Property Laws"  This is important specifically when a married couple [and only a married couple] are the two partners [and only two partners] in an LLC.

Summary Answer to your specific question :

1. Since you live in a Community Property State, the IRS disregards the fact that you operate an LLC {an "entity"] and instead treats you as if you are dual "Sole Proprietors" of this entity.  This means that instead of filing a Form 1065 Partnership return which then submits to you as two individuals Schedules K-1 for each of you to use in your Form 1040 filing, You & Spouse may just file the Form 1040 but each of you has a separate Schedule C [using your personal SSN typically] with income and expenses allocated between each of you [possibly just dividing monetary entry in half, for example] and then each of you has to also have a Schedule SE and pay Self-Employment Tax [instead of having the LLC pay employer side and you personally pay employee side - its the same amount in total].
   
   
2. You must enter in the Business Income Section as if you own two separate businesses, one in your name and one in your spouse's name - and allocate each entry from the previously combined Schedule C - income entries, expense entries, etc., into two separate Schedules C one for each of you and that in turn will generate two Schedules SE.

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DETAILED & COMPLEX  & GENERAL Answer RE: LLC's & Married Couples as dual owners
 - for the general case and for anyone else reading this answer about LLC's owned by a married couple.

This answer is only appropriate to the case where an LLC is co-owned by a married couple residing in one of the nine states with Community Property laws.

Please see below why it is that both spouses may file Schedule C and Schedule SE if the entity is organized as an LLC but because only two partners exist and the two partners are a married couple and the residence is in a Community property state and the couple chooses to file not as a Partnership (Form 1065) but as Sole Proprietors.

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As of 2007, any married couple living in a community property state who own, jointly and participate jointly an LLC may still consider the LLC to be a "disregarded entity"  - called an SMLLC (single member llc), and each then can avoid filing a Form 1065 or other return and simply file, each, a Schedule C and SChedule SE to their joint or separate Form 1040s.  For authorization, please read the citation incorporated below.

Who is eligible to file as dual Sole Proprietors and not require filing a Form 1065? 
>>>>>>Married taxpayers who are domiciled in one of the following community property states:

• Arizona,
• California,
• Idaho,
• Louisiana,
• Nevada,
• New Mexico,
• Texas
• Washington, or
• Wisconsin.

Note that you allocate the income and deductions between the two Schedules C (and the resulting SE) according to some logical method.  This way both spouses achieve their individual Social Security paid quarters status [and of course pay SE taxes!] 😉   - since FICA and Medicare goes to the individual credit and not the married couple as a couple.

BUSINESS product is not needed! 

Any personal product will do - buy ANY version of personal product, preferably the DESKTOP -  - and you can choose any version - although the basic is too basic for most - all versions produce the same forms - if unfamiliar with Schedule C, may be best to pay the additional cost of H&B

Can a husband and wife run a business as a sole proprietor or do they need to be a partnership? 

It is possible for either the husband or the wife to be the owner of the sole proprietor business. When only one spouse is the owner, the other spouse can work in the business as an employee. If a married couple who file a joint tax return elect to conduct their business activities as a qualified joint venture, (a trade or business entity in which the husband and wife materially participate in such venture - see citation above as this is allowable for Federal taxation purposes only in Community Property states), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture. This is effective for taxable years beginning after December 31, 2006.

[shishirdahal]

Thanks a lot for the explanation. One more last question:
1. as per your #2 above, I am creating 2 business although we have single LLC. We have EIN for the business but you are suggesting to use our personal SSN. Where do I put the EIN, is it not needed?

[ScruffyCurmudgeon]

Many folks who operate small sole proprietorship business don't bother to file for and use a separate EIN, and then have to refer to that when they file their Schedule C.  It is really optional. If you prefer to use your SSN, no worries.

If you use EIN, it is entered as you proceed in the Schedule C Proprietorship interview, or if you want to change it, jsut open Forms Mode to the Schedule C and change it.

[shishirdahal]

I have one more issues now. On these 3 forms below, I have them on only one of us (ie Husband's Schedule C but not on Wife's). As a result, one of us has loss on Schedule C and other has profit and needs to pay Sellf Employment tax.
Forms: (1) Car & Truck Worksheet (2) Form 8829 "Expenses for Business use of your home" (3) 4562 "Depreciation and Amortization"

I was to distribute them equally between both of us. How do I do that?

[ScruffyCurmudgeon]

See additional answer below (or above, never sure where the AXE decides to locate answers).

[shishirdahal]

Thanks a lot for the help. I have divided all the expenses in half for myself and my wife. But Depreciation of home (mine is home based business) - I can't divide in half. Turbotax does not have that facility, I hope.  It interviewed me and I answered all questions and seems like it deducted depreciation on both of us, which seems wrong. How do I fix this? Can I just delete depreciation from my part?

Also, as I said in my initial question, I also see one K1 form. Since we have Schedule C/SE, should I just delete that K1?

[ScruffyCurmudgeon]

divide the calculated depreciation in half - This would all be so much simpler if you used the Desktop software because then you could make the entries of calculations right into the Form 8829 & Worksheet

<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p587#en_US_2018_publink1000341">https://www.irs.gov/publications/p5...>

<a rel="nofollow" target="_blank" href="https://www.fool.com/taxes/2018/05/20/say-goodbye-to-the-home-office-deduction-unless-yo.aspx">https...>

[shishirdahal]

I am using Desktop version. but
1. I can't edit any of those numbers on 8829 & Worksheet. How do I do that?
    Also, where/which line numbers do I change those? I am looking line 30, which comes from line 42. I can't modify line 42 either.
2. Do I need only single 8829 & Worksheet? I have them on both of us now.
3.

[ScruffyCurmudgeon]

strange - the icon at the top of the page next to your name shows online

The trade-off from doing a Form 1065 which takes in all income and all expense and then just allocates to partners the shared income and credits, versus doing the SMLLC route as married couple is that everything has to be entered in duplicate after splitting all financial numbers.  You do need to act as if you have two homes with two 8829 because each 8829 feeds the two separate Schedule Cs

The alternative is for one spouse to show higher expense (and higher income) and take the entire 8829 on the one spouse.

[shishirdahal]

Thanks, I like the alternative approach better :). Also, as I said before, I also see 1065/K1 form on forms kist. Should I delete that because I have Sch C

[ScruffyCurmudgeon]

yes.
If you like the answer, please recommend it - us retired firefighters appreciate

[ScruffyCurmudgeon]

@shishirdahal

Unfortunately, the TurboTax Online is an impediment to accomplishing what you want to do, that is to make your own decisions on how to allocate income and expense between the various Schedules C necessary for you to file.

As was stated in the earlier answer: "income and expenses allocated between each of you [possibly just dividing monetary entry in half, for example] " You need to allocate the amounts of income and expense between the various Schedules C.  So how to do that?

Almost none, if indeed any, of the "superuser" volunteers here use the online themselves, but instead obtain the Desktop software.  The installed on your computer software has many advantages but one of the strongest arguments for it is the ability to easily switch back and forth between the interview and "Forms Mode" where the latter gives you direct access to the forms as they are created and filled in.  In Forms Mode you can go to a field such as a given expense on the Schedule C and by right clicking (or CTL-I) create a supporting accounting sheet for that field where you can, and you must do it for each Schedule C, an allocation of the specific income or expense data item.  It may be tedious but it accomplishes what you want.  Be very careful to prepare before doing this by having an accounting of the total of each dollar amount to be allocated (for example, build one Schedule C alone with everything and then as stated about the accounting supplement, by negative entry allocate out pieces of each $ amount) and enter that allocated amount in the relevant Schedule C.

IF you want to take this on, since it will not cost you more because instead of paying for the online service filings you can buy the software at discount now (such as at Costco - discount until beginning of March, or BJ's or Amazon) for a roughly equivalent amount.

Here is the information on how to switch => https://ttlc.intuit.com/questions/1901476-how-do-i-switch-from-turbotax-online-to-the-turbotax-softw...

[Vanessa]

If you are not in a community property state, you should have received 2- k-1's for the LLC.  If you used TurboTax business, you will need to go back and correct that in there. The LLC would file a 1065 and issue a K-1 to each of you. You should not have a Schedule C if you are entering a K-1 from your LLC. 

If you are in a community property state, then you would not have a K-1, you would just have two Schedule C's where all income would be reported.