For your situation and filing history, the advantage of continuing to file Form 1065 is that the IRS considers your LLC to be a partnership. This assumption was made the first year you filed as a partnership on Form 1065.
You are correct that the activity of an LLC owned solely by a husband & wife in a community property state may be reported on a personal Form 1040 return. The activity is allocated between the spouses on two Schedules C as part of the jointly-filed return.
If you choose to report on Schedules C, you would not file Form 1065 for that tax year. You may receive a notice from the IRS asking for a Form 1065 for this tax year. If so, contact the toll-free number that is shown on the notice and advise the agent that you reported the income on your jointly-filed individual income tax return. This response can also be done in writing. Be prepared to reference Rev. Proc. 2002-69, 2002-2 C.B. 831.
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