I hate online legal forms so that anyone can open entities!

[NECPA in NEBRASKA]

A new client, created an LLC online in 2014 with he and his wife as the partners. His wife has nothing to do with the business. It is strictly a service business. He did open a checking account in the LLC name. He had no idea that he would be stuck with two tax returns and that his wife would end up with 50% of the income. I have both the 1065 and the 1040 on extension. He wanted to be a Schedule C, but didn't answer the online questions correctly. Does anyone know how to get out of this mess? They live in Iowa. Someone has told him now to file as a Sub S and he won't have to pay income tax on his profit. I explained that it doesn't work like that if I prepare the return, especially when it virtually all profit. 

They have always prepared their own returns and are very cost conscious so NOW they don't want to file two returns. 

Thanks for any ideas on how to make this easier. I would like to kill the partnership, if it's possible.

[jklcpa]

What about the wife gifting her shares in the LLC to her husband?  The gift would create a technical termination on the date of the gift from a tax standpoint since there would be only one owner after the gift and the LLC would then become a single-member disregarded entity on that date.  There should be no gift tax consequences since it is from one spouse to the other.  I am not familiar with Iowa law to know the ramifications this might cause, but I do know that Iowa is not a community property state, so this couple is not able to use the provision that says a husband-wife-owned LLC can be a disregarded entity, which I assume you already knew and the reason for your question.

[NECPA in NEBRASKA]

This would be possible. I don't know what they would be worth, since there was never any money put into it to start up and no assets in the LLC name. He is really sorry that he didn't call someone before answering the questions online. 

[jklcpa]

Oh, I think that the value would be minimal because it's a start-up with no name recognition, no established customer base, closely held, it's probably limited to one small geographic area, etc. I don't even think a gift tax return is required between H & W anyway. Husband would pick up wife's basis.  Again, not familiar with the state laws though.

[NECPA in NEBRASKA]

Thanks, Judy. It is such a pain when people try to save money by doing stuff online and then create a can of worms. 

[Lion EA]

I had a client who did the online thing and ended up with a Delaware MMLLC via an agent.  She had no partners, just her.  She called the IRS and managed to be reclassified as a SMLLC right on the telephone and was told to keep the same EIN.  The fact that she was a young gal with a southern accent might have helped, or tears!  If your client is really sorry, he can wait on hold for the IRS to give it a try.  Or, pay you for two tax returns.

[Gail in Virginia]

I wonder how much money he saved by doing this himself without getting advice......

[JohnH]

I had a client who did the online thing and ended up with a Delaware MMLLC via an agent.  She had no partners, just her.  She called the IRS and managed to be reclassified as a SMLLC right on the telephone and was told to keep the same EIN.  The fact that she was a young gal with a southern accent might have helped, or tears!  If your client is really sorry, he can wait on hold for the IRS to give it a try.  Or, pay you for two tax returns.

I don't fit either the young or the gal classification, but I'm convinced that the southern accent has been very helpful at times when speaking with someone at the IRS.   

[RitaB]

I don't fit either the young or the gal classification, but I'm convinced that the southern accent has been very helpful at times when speaking with someone at the IRS.   

I'll swear to got it is, and I'll say to yer face.

[JohnH]

Well bless your heart.

 

[Lion EA]

I'm going to have Rita make all my calls from now on!

[RitaB]

My trainer: