Should I file 1065? LLC formed 7/17. Multi member. No biz expenses/income/deductions, but each partner has unreimbursed biz expenses. We plan to deduct from w-2 income.

[Tr2018]

LLC itself has no income/expenses, however, each partner has unreimbursed business expenses and plans to deduct from regular w-2 income. It was formed in July 2017. Business expenses include licensing, LLC formation costs, dedicated home office as LLC has no facilities to conduct business in. Dedicated room in house for business only activities.These expenses were paid by each member individually. Am I required to file form 1065 if only deductions are coming from unreimbursed business expenses?

[Rick19744 · Accepted solution]

A few comments based on your fact:

• The key is whether or not you have begun your trade or business.  If you have unreimbursed expenses, it sounds like you have started your business.
• Formation costs are part of organizational costs and can be deducted within limits or capitalized and amortized under Section 709.  Not sure exactly what the licensing expense is, but this may also fall under organizational costs.
• Not sure I understand your reimbursement plan.  Doesn't seem to make sense.
• As a multi-member LLC you are not an employee of the entity.  As such, a working member of the LLC cannot be paid a salary and issued a W-2.  Working members are paid via guaranteed payments and no withholding.  The member picks this up on their 1040 and pays SE at the individual level.
• While the facts are not real clear, it does sound as if you have begun your business and have expenses if you are getting reimbursed.  This requires filing a form 1065 and applicable K-1's.

[Tr2018]

Thank you for your response Rick.

The W-2 is from my regular 9-5 job. The LLC is a business I’m doing with a business partner. Basically we started making purchases for the business prior to having a business bank account. All expenses came from our own pockets as the business isn’t going to generate revenue until at least mid 2018.

When I began filing my taxes, I was asked whether or not there were unreimbursed expenses made from either partner. When I put in my expenses, it reduced my tax liability displayed on TurboTax for my personal return. It also asked me if I received a K-1 1065. After doing some research, I found varying answers online as to whether or not I need to file a 1065. The business had no income to report nor had there been any expenses coming from an account linked to the LLCs EIN. All expenses came out of our personal bank accounts.

If I claim these expenses as unreimbursed business expenses, am I required to file 1065? I called the IRS and asked and they said if there’s no income or expenses then a 1065 isn’t required in the first year. I’m confused as to whether or not the unreimbursed business expenses are categorized as business expenses or personal expenses.

[Rick19744]

We need to step back here.
1) There is no 1065 filing requirement if you have no income or expense to report.
2) The generation of revenue or income is not a determining factor in whether or not you need to file a 1065.
3) The decision on the "expenses" is one you need to make.  If you have not started your business, then claiming these as unreimbursed business expenses will need to be taken on Sch A subject to 2% floor.  Not a good result.  Not really sure if these are unreimbursed business expenses if you don't have a business at this point.  You could get reimbursed from the LLC which would then be expenses of the LLC and definitely require a 1065 be filed (if the business has started).  If you don't believe that you have started the business, then these expenses are really capital contributions to the LLC and would need to be classified as start-up costs under Section 195.  These will be handled similar to the organization costs noted above.  You could deem these costs as a loan to the LLC, but then you should have an agreement with the LLC and charge interest on the loan, which would require interest expense and the filing of a 1065.

[Tr2018]

Rick,

Thank you for clarifying this for me. It has really helped me out. I’ve been reading things online for weeks and this has been very helpful!

[Rick19744]

Welcome