Filing my Form 1065 U.S. Return of Partnership Income is getting to be a bit of a drag each year.
If I do this right, I'll have to file one more set of 1065s, in March 2024, and that's it.
Late 1065 filing that isn't actually late 1065 filing
We have two limited liability companies (LLCs) and my wife and I are equal owners of each. “We're in this together” and all that.
We're required to file IRS Form 1065 and two Schedule K-1s for each LLC by March 15th.
Because these LLCs haven't had a ton of profit over the past few years, we've filed them with paper forms and mailed them to our IRS Processing Center. Electronic filing of each one would be a significant portion of the profits.
A few days ago, for the third time, we got letters from the IRS saying that we filed late.
The thing is we didn't file late. We mailed them both on March 8th, a week before the deadline.
Because this has happened to us before, we paid to send them by certified mail to give the required proof of mailing date. The postmark on the envelopes should have been the same day as that, but this piece of information seems to have gotten lost for the past few years.
Questioning my (business) life choices
The solution to getting rid of the $880 in unjustified penalties was to call them up, explain that I have the proof of mailing for each one, and fax copies of the receipts to them. Then they abated the penalties for the first LLC, then for the second.
Ms. Steele was pleasant enough and patient when I spoke with her. And the call-back feature the IRS has was really nice and worked as advertised; I didn't have to stay on hold while I was in the queue.
But, ya know … there are better ways to spend my time than on the phone with the IRS, asking them to remove tax penalties that I shouldn't have gotten in the first place, year after year.
To be fair, I have deserved penalties in the past because I missed important changes when things were due. One time it was nearly $1,600 for late filing. Calling the IRS promptly got me a mulligan on those penalties though.
Not the past few times though.
This (finally!) got me thinking about how to get out of this annoying little cycle. Here are three tacks I considered (the last one is the best way for us):
1. File Form 1065 electronically (too expensive for now)
The quickest and probably the surest way to avoid future IRS kabuki dances like these would be to file electronically.
The transfer would happen quickly, and I'd get quick confirmation that the IRS received it.
There's no chance for the returns to get lost in some understaffed room stripped of its postmark. The datasets would come with unambiguous timestamps that would be saved with the data in the forms. No room for misinterpretation unless someone did so deliberately, which I doubt anyone would.
If we pulled in five figures or even mid-four figures, I could possibly justify the $125 charge or so to file these forms electronically.
But we don't, so we won't.
2. File our LLC income/loss on Schedule C (non-starter)
I had heard before about the possibility of being able to file our LLC profit-loss information on Form 1040 Schedule C because the LLCs were owned exclusively by a married couple.
This would let us move away completely from filing the (for us problematic) Form 1065.
IRS Revenue Procedure 2002-69 provides for the classification of certain business entities as “qualified” for simplified tax treatment as a disregarded entity.
The three conditions for this kind of treatment are the following:
- If a qualified entity (as described in section 3.02 of [Revenue Procedure 2002-69]), and the husband and wife as community property owners, treat the entity as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is a disregarded entity for federal tax purposes.
- If a qualified entity (as described in section 3.02 of [Revenue Procedure 2002-69]), and the husband and wife as community property owners, treat the entity as a partnership for federal tax purposes and file the appropriate partnership returns, the Internal Revenue Service will accept the position that the entity is a partnership for federal tax purposes.
- A change in reporting position will be treated for federal tax purposes as a conversion of the entity.
These conditions unfortunately are a non-starter for us because we live in Virginia. There are only nine community property states, and Virginia isn't one of them. (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.)
Oh well. Not quite ready to move yet!
3. Transition to a qualified joint venture (what we'll likely go with)
This is a variation on “get around filing Form 1065” that will work. It's a bit more preparation for us, but it will allow us to restructure things to be simpler and more together.
Back a few years, the Small Business and Work Opportunity Tax Act of 2007, aka Public Law 110-28, allows for a married couple running a business to file a joint personal return to elect not to have the business be treated as a partnership for federal tax purposes. This structure is called a qualified joint venture.
The conditions for this status are the following:
- The only members of the joint venture are a married couple who file a joint return.
- Both spouses materially participate in the trade or business.
- Both spouses elect not to be treated as a partnership.
Since the qualified joint venture isn't a partnership, income and loss would go on Form 1040 Schedule C. This has the benefit of not being Form 1065.
What we will have to deal with, though, is closing down our LLCs and standing something up that is not. LLCs and corporations cannot be treated as a qualified joint venture here.
For now, though, that's all right. I started getting into business ventures here and there some 20 years ago and did things without a lot of formal training in business. Not necessarily a bad thing in itself, but I made missteps along the way. Part of this, maybe, was setting up LLCs when I didn't really need to.
Going this route will allow us to consolidate things and make things quite a bit simpler.
We'll likely have to file 1065s for our 2023 business taxes regardless since it's the middle of the tax year now, but if we plan things correctly, we can shut down the LLCs on December 31st, and bring the new business entity up on January 1st, 2024. (There are a lot of details related to this and it will probably take a good month to figure them all out!)
Takeaways
Don't be afraid to change your business structure if it isn't working out.
Plan ahead enough so that there's time to do any transitions correctly.
Make your business structure fit your business.
