Married co-owners of LLC getting conflicting advice on income tax issue
March 21, 2018 8:37 AM Subscribe
I have two accountants, and they are disagreeing with each other on a tax question related to a business venture.
My spouse and I reside in New York State. We formed an LLC in 2017. The company is a retail business. My spouse is the majority partner. There are no other partners.
We have an accountant who has long helped us with income tax returns. We always file married-filing-jointly and would like to do so again for 2017.
In addition to the tax accountant, we now have a different accountant who helps with the business accounting (though he also knows how to do tax returns). We're getting conflicting information from the two accountants.
Our business accountant is telling us that we can't file a Schedule C for the LLC. He says that we need to file a Form 1065, because New York State is not a community property state, and the federal government doesn't recognize LLCs as a business entity (or some such thing).
Our tax accountant is telling us that the other guy is full of crap, and that there is no reason why we can't file a Schedule C and just split the income between us (the two spouses). He says that filing a Form 1065 just adds extra paperwork for no purpose.
From what I can tell based on Google searches, the business accountant is right, but I'm not sure. Anyone with experience in accounting care to weigh in? I hate to think that we need to hire a third accountant to break the tie.
My spouse and I reside in New York State. We formed an LLC in 2017. The company is a retail business. My spouse is the majority partner. There are no other partners.
We have an accountant who has long helped us with income tax returns. We always file married-filing-jointly and would like to do so again for 2017.
In addition to the tax accountant, we now have a different accountant who helps with the business accounting (though he also knows how to do tax returns). We're getting conflicting information from the two accountants.
Our business accountant is telling us that we can't file a Schedule C for the LLC. He says that we need to file a Form 1065, because New York State is not a community property state, and the federal government doesn't recognize LLCs as a business entity (or some such thing).
Our tax accountant is telling us that the other guy is full of crap, and that there is no reason why we can't file a Schedule C and just split the income between us (the two spouses). He says that filing a Form 1065 just adds extra paperwork for no purpose.
From what I can tell based on Google searches, the business accountant is right, but I'm not sure. Anyone with experience in accounting care to weigh in? I hate to think that we need to hire a third accountant to break the tie.
Not a community property state, multi-member LLC with two spouses, unless the tax accountant can actually cite a change in tax law that made this okay in the last few years since I did taxes, then I'd be asking your business accountant if it's too late to add your personal and partnership returns to what he's doing for the year. Which--this is very late to be doing that, but you don't want a tax accountant who doesn't know this. I haven't done this for years and I know this. It is silly extra paperwork, but it's required silly extra paperwork.
Anyway, you don't want separate accountants like this, so not only do you not want three, you don't even want two. The thing you want is for a business accountant to do the whole thing, because they should be doing your business accounting in software that will export to the 1065, and then the 1065 in the same tax program as the 1040 so that it will automatically import the K-1 data. If you split this up, somewhere in the middle you introduce extra data entry and review and potential communication issues. The fact that your current tax accountant clearly isn't very good is just kind of icing.
A lot of tax accountants do this wrong, but you do not want to pay those people to do work for you.
posted by Sequence at 9:07 AM on March 21, 2018 [6 favorites]
Anyway, you don't want separate accountants like this, so not only do you not want three, you don't even want two. The thing you want is for a business accountant to do the whole thing, because they should be doing your business accounting in software that will export to the 1065, and then the 1065 in the same tax program as the 1040 so that it will automatically import the K-1 data. If you split this up, somewhere in the middle you introduce extra data entry and review and potential communication issues. The fact that your current tax accountant clearly isn't very good is just kind of icing.
A lot of tax accountants do this wrong, but you do not want to pay those people to do work for you.
posted by Sequence at 9:07 AM on March 21, 2018 [6 favorites]
My friend with two businesses and a spouse has one accountant who does both the business and the personal taxes for her and her husband.
Perhaps you need one accountant who would do both as well, as opposed to a third accountant necessarily?
posted by zizzle at 9:08 AM on March 21, 2018
Perhaps you need one accountant who would do both as well, as opposed to a third accountant necessarily?
posted by zizzle at 9:08 AM on March 21, 2018
Best answer: Your business accountant is correct. Normally partnerships have to file form 1065 and then each partner includes a K-1 form with their return. Since 2007 a married couple who are the sole owners of a partnership have the option, if eligible, to be considered as a "qualified joint venture" and instead file two separate Schedule C forms with their joint personal tax return. However, a married couple who own an unincorporated business as co-owners in a non-community property state in the name of a state law entity, such as an LLC, do not qualify for the "qualified joint venture" election. See IRS: Married Couples in Business and IRS:Election for Married Couples Unincorporated Businesses.
posted by RichardP at 9:15 AM on March 21, 2018 [2 favorites]
posted by RichardP at 9:15 AM on March 21, 2018 [2 favorites]
1. Your business accountant has probably finished your work by now or is apparently knowledgeable enough about your file to have informed you this. Either way, you know what the business owes or is owed.
2. If they can, get your business accountant to take over your personal forms, if they are in the thick of this - and they are worth their calculator - they want your personal returns because of the complexity your business has now caused - they want your taxes done right. Their name is *also* on your tax return and they don't want your tax return to mess up their reputation. Yes, it is late in the game for this, but it may be a seriously smart move.
3. You can prepay and file for an extension. The key part of that statement is *prepay*. You likely know what you paid last year. You know how your business did this year comparatively... make an estimate and file an extension if you need to. Ask your accountant if you should file and submit your LLCs taxes now or if you should extend those as well so they are one comprehensive package. I don't care if you are burning bridges with your old accountant. They aren't doing you any favors right now.
4. You have an LLC that - even if it is only the two of you - is *not* a sole proprietorship/hobby. It is a business and you want to make sure that you understand clearly what money is your money, what money is the business's money, how you pay yourself a dividend, what the outcome of doing so is, what expenses your business should be paying for and so on.
5. Your old accountant may throw a fit. Who cares? You want your taxes done right.
6. If in the extremely unlikely and off chance your business accountant does not do personal taxes along with the business taxes... still change personal tax professionals to someone who can answer that question properly or at least asks relevant questions.
7. Rule of thumb with taxes: If it is harder and is more work, it is probably the right way.
I am not an accountant. I am the son of a CPA. My wife owns a sole proprietorship which is loosely affiliated with a LLC. We chose not to be an LLC for a lot of the reasons you are experiencing now. We do our taxes, and my mom checks them every year. For the past 3 months, I've gotten to hear about tax season weekly form my mom. This is her last year doing taxes - and trust me she's going out on top of what she knows...
On preview: Confirmed 1065 and a K-1 like RichardP says.
posted by Nanukthedog at 9:45 AM on March 21, 2018 [1 favorite]
2. If they can, get your business accountant to take over your personal forms, if they are in the thick of this - and they are worth their calculator - they want your personal returns because of the complexity your business has now caused - they want your taxes done right. Their name is *also* on your tax return and they don't want your tax return to mess up their reputation. Yes, it is late in the game for this, but it may be a seriously smart move.
3. You can prepay and file for an extension. The key part of that statement is *prepay*. You likely know what you paid last year. You know how your business did this year comparatively... make an estimate and file an extension if you need to. Ask your accountant if you should file and submit your LLCs taxes now or if you should extend those as well so they are one comprehensive package. I don't care if you are burning bridges with your old accountant. They aren't doing you any favors right now.
4. You have an LLC that - even if it is only the two of you - is *not* a sole proprietorship/hobby. It is a business and you want to make sure that you understand clearly what money is your money, what money is the business's money, how you pay yourself a dividend, what the outcome of doing so is, what expenses your business should be paying for and so on.
5. Your old accountant may throw a fit. Who cares? You want your taxes done right.
6. If in the extremely unlikely and off chance your business accountant does not do personal taxes along with the business taxes... still change personal tax professionals to someone who can answer that question properly or at least asks relevant questions.
7. Rule of thumb with taxes: If it is harder and is more work, it is probably the right way.
I am not an accountant. I am the son of a CPA. My wife owns a sole proprietorship which is loosely affiliated with a LLC. We chose not to be an LLC for a lot of the reasons you are experiencing now. We do our taxes, and my mom checks them every year. For the past 3 months, I've gotten to hear about tax season weekly form my mom. This is her last year doing taxes - and trust me she's going out on top of what she knows...
On preview: Confirmed 1065 and a K-1 like RichardP says.
posted by Nanukthedog at 9:45 AM on March 21, 2018 [1 favorite]
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(Assuming, y'know, you're paying them per hour, and that the tax accountant's e-mail or whatever doesn't straight-up say WOW WHAT A FUCKING MORON.)
posted by joyceanmachine at 9:04 AM on March 21, 2018