My wife and I created a revocable trust to avoid probate. We have an LLC and made the trust to be the sole member of LLC. We completed form 1065 and the IRS sent a letter saying that the returns do not meet the filing requirement for partnership returns and that they are removing our partnership filing requirement; they advised in the future to report profit and loss on individual IT return using Schedule C and income/expense from rental activities on form 1040 Schedule E. I do not actively participate in rental activity; a rental company manages everything for a fee. Do we have to file Turbotax Home and also TT Business? Can we avoid form C and E if we change to 2 member LLC with the trust and one of us being the members? Thank you.
a revocable trust (one person or joint) is a disregarded entity but if it has an EIN and receives tax reporting forms using an EIN?TIN it must file grantor trust returns (1041 using Turbotax Business) the income passes out via a grantor trust letter to the grantors who must then report the items on their 1040. a single member LLC is what you had when the trust was the sole member. thus it was not a partnership. its like the trust and LLC don't exist so it's reported as if there was direct ownership - rental activity on schedule E.
now let's say you add one of you as a second member. you have now complicated things. the LLC would need to file a 1065 and issue k-1s to its members - both the individual and the trust. the k-1 to the individual member gets reported on their 1040. but through the use of the k-1 for a partnership. now the Trust must file form 1041 as a grantor trust and issue a grantor trust letter to each grantor (one to each of you). again this info gets reported on your 1040 tax return but in this situation, since the trust is disregarded, the info, asuming it's rental, gets entered on a separate schedule E for each of you. each of you must detail the income and each item of expense just as you would if you had owned the real estate directly.
