Honestly I hadn't considered doing it manually since I'm pretty intimidated by all the tax forms. Is Form 1065 something a regular person can figure out without an accounting background? And how would I calculate all the specific numbers for the K-1s?

Form 1065 is definitely doable without an accounting background, especially for a small, straightforward LLC with just two members. The IRS provides detailed instructions, and there are plenty of free guides online. For the K-1s, you basically take each income and expense item and allocate them according to your ownership percentages. So if your LLC had $10,000 in profits, your wife's K-1 would show $5,100 (51%) and yours would show $4,900 (49%). Same with deductions and credits. The actual form walks you through each line item. The trickiest part is usually just gathering all your business income and expense information, which you'd need to do for any tax preparation method anyway.

We're just a regular LLC with no special tax elections. When we formed it, we didn't do anything special with the IRS, so I think we're taxed as a partnership by default? Now I'm worried we messed that up too...

You're good then! You're right that a multi-member LLC is taxed as a partnership by default if you didn't make any special elections. You'll need to file Form 1065 and prepare K-1s for both of you showing the 51/49 split. One more thing to consider - if this is your first year filing, make sure you've obtained an EIN (Employer Identification Number) from the IRS. You'll need this for your partnership return. If you haven't done this yet, you can get one instantly online through the IRS website.

Lenders often have some flexibility with the timing, especially if you're proactive in discussing it with them. While they have reporting requirements, they sometimes can work with you on structuring the forgiveness. For example, some lenders might be willing to split a large debt cancellation across two tax years (December/January) if you explain your tax situation. It really depends on the lender and your relationship with them, but it's definitely worth having that conversation well before the planned cancellation.

That's a really helpful suggestion about timing it with medical expenses. I do have some procedures I've been putting off that would probably hit the threshold for medical deductions. Do you know if lenders are usually open to negotiating the timing of debt cancellation? I wasn't sure if I had any control over when they issue the 1099-C.

Good point! Also, some states follow federal insolvency rules and some have their own. I live in California and they have slightly different rules for cancelled debt than the IRS does.

Don't bank statements expire after 7 years? How would someone even get statements from 10 years ago to reconstruct income?

Most banks only provide online access to 7 years of statements, but they often retain records for longer periods. Your client can request older statements directly from their bank - there's usually a fee, but many banks can produce statements from 10+ years ago if needed. This can be extremely valuable for income reconstruction. If bank statements truly aren't available, there are alternative approaches: industry standard rates applied to known work activity, client's recollection of approximate customer counts and average charges, third-party records (like appointment books or contracts), and even client's lifestyle expenses during those periods can establish baseline income needed to maintain that lifestyle.

FTA typically only applies to one tax year - usually the earliest one with penalties. However, I've had success requesting reasonable cause abatements for the additional years by documenting why the client failed to file (medical issues, natural disasters, bad advice from previous accountants, etc). Worth trying for all years, but expect FTA to only work for one.

But that's still wrong - the total isn't 3.8%. The Additional Medicare Tax is 0.9%, which when added to the 2.9% regular Medicare tax equals 3.8%. Is that what you meant?

Yes, that's exactly what I meant. The base Medicare tax is 2.9% on all SE income. Then the Additional Medicare Tax of 0.9% kicks in at those higher income thresholds, bringing the total Medicare portion to 3.8% (2.9% + 0.9%). I should have been clearer in my wording. Thanks for pointing that out. This conversation perfectly illustrates how even small differences in how tax concepts are explained can lead to confusion!

The wage base is tied to the National Average Wage Index so it automatically increases with inflation. It's gone up dramatically in recent years because wages have been rising so quickly. You can always find the current wage base on SSA.gov rather than relying on articles that might be using outdated numbers.

Thanks for explaining that! I didn't realize it was tied to wage inflation. Makes sense why it's been jumping up so much these past few years. I'll bookmark the SSA site for future reference.

Do you happen to know if health insurance premiums for yourself (the sole prop) count as eligible expenses for the remaining 40%? I've been getting conflicting information.

For sole proprietors with no employees, health insurance premiums for yourself do NOT count as an additional eligible expense for the 40% portion. This is because health insurance for the owner is already factored into your net profit calculation on Schedule C. The eligible expenses for the 40% portion are limited to business mortgage interest, rent or lease payments, and utilities that were in place before February 15, 2020. The rules are a bit different for businesses with employees, which is probably why you've been seeing conflicting information. Always best to check with your specific lender since they'll be the ones processing your forgiveness application.

I got PPP for my sole prop photography business while having a full-time W2 job. Your bank is wrong - there's nothing in the PPP rules that disqualifies you for having W2 income. Try applying through a smaller bank or credit union, or one of the fintech lenders like BlueVine or Kabbage. I applied through BlueVine after BofA gave me similar pushback and was approved in 3 days.