MMLLC reported as SMLLC

Technical topics regarding tax preparation.
#1
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Have a client who last year gave me income from a very small online clothing resale store. Everything they indicated was that the LLC was the wife's and did not tell me that they had actually setup an husband/wife MMLLC instead. On their 2020 return we reported as a schedule C under the wife's name. Upon discovering the issue, I called the IRS and they are not looking for a return for 2020.

#1) Is this a case that we can file and 8832 to change it from MMLLC to SMLLC for tax purposes? This is a very small ordeal, less than 10K in annual sales. A 1065 seems overkill here.

#2) If we continue to report it as a schedule C, will the IRS just view this as a LLC that had no activity since no 1065 was filed?
Last edited by warnickcpa on 11-May-2022 12:54pm, edited 1 time in total.
 

#2
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Community property state?
If so, leave well enough alone. Separate property state, I'd have them adjust ownership to only wife or pick up MMLLC reporting next year. There's little reason to go back and change anything in 2020 for this dynamic.
Because all income was timely reported, they qualify for late filing penalty relief under RP 84-35, if it were ever to come up (which it won't).
~Captcook
 

#3
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CaptCook wrote:Community property state?
If so, leave well enough alone. Separate property state, I'd have them adjust ownership to only wife or pick up MMLLC reporting next year. There's little reason to go back and change anything in 2020 for this dynamic.
Because all income was timely reported, they qualify for late filing penalty relief under RP 84-35, if it were ever to come up (which it won't).


No, unfortunately they live in OH. Would filing it as a schedule C for 2021 and 2022 be okay? If we file the 8832 it wouldn't take affect until 1/1/2023 anyways...
 

#4
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What would the 8832 do?
If you're going to treat it as a MMLLC with a 1065, that doesn't require an election. It's a reflection of fact. You could do that for both 2021 and 2022 at this point. 2021 will be late, but you fully qualify for relief under RP 84-35. So, there's no problem there.

I get the impression the client would prefer to report as Sch C. If that's the case, remove the husband from ownership and you now have a SMLLC, which is consistent with your reporting.
~Captcook
 

#5
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CaptCook wrote:What would the 8832 do?
If you're going to treat it as a MMLLC with a 1065, that doesn't require an election. It's a reflection of fact. You could do that for both 2021 and 2022 at this point. 2021 will be late, but you fully qualify for relief under RP 84-35. So, there's no problem there.

I get the impression the client would prefer to report as Sch C. If that's the case, remove the husband from ownership and you now have a SMLLC, which is consistent with your reporting.


My only concern is that when they registered the EIN they registered it as a MMLLC, so the EIN letter would state that the IRS is looking for a 1065 to be filed. That's all, if removing the husband from ownership is all it takes, could the IRS ever ask why a 1065 was never filed or on their end will it just look like it had no income and expenses so a 1065 was not warranted?
 

#6
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EIN letter doesn't mean jack. We've discussed this many times here. The EIN letter isn't determinative of income tax classification. We've all had clients use the EIN portal and input that they were MMLLCs when they were SMLLCs and SMLLCs when they were MMLLCs. You never hear from the IRS.

I agree with the Captain. File how they want to file and don't lose sleep over it. I've killed a few spouse-spouse MMLLCs after thorough discussion with the client by turning them into SMLLC DREs because the economies of scale don't justify a partnership return. How do I do that if there's no written agreement and it's strictly a verbal agreement? I just start filing as a DRE. It's really that simple. We never hear from the IRS.

Of course if 1099s are being issued and 1065s were previously filed you may have to contend with that or respond to a notice. That response should be a rather simple explanation though.
 

#7
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Consider an affidavit that the title was joint by mistake.
Steve
 


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