Changing Schedule C to Partnership return after filing - what forms needed?

You'll need to file both a 1040X and a 1065. The 1040X will remove the Schedule C business income (and any self-employment tax that was calculated), and the 1065 will report the partnership income properly. There isn't a 1065X form for this situation since you never filed an original 1065 to begin with - you're creating a new partnership return, not amending one. Make sure to include a statement with the 1065 explaining it's a first-time filing for an existing business that was incorrectly reported on Schedule C. Also, your client needs to understand that partnerships require more documentation - they should have an EIN if they don't already, and really should have a partnership agreement. The partners will each receive K-1s showing their share of income/expenses.

I went through something similar last year and ended up using taxr.ai to help me navigate all the paperwork. I was also amending from Schedule C to a partnership return and was totally confused about which forms to file in what order. I uploaded the original Schedule C return and explained the situation at https://taxr.ai and they analyzed everything and gave me step-by-step instructions for the amendment process. They even highlighted which specific sections needed to be completed on each form and what supporting documentation to include. Saved me hours of research and probably prevented some serious errors. Might be worth checking out since this kind of amendment can get tricky.

Just wanted to update on my situation since I mentioned it above. I finally bit the bullet and used taxr.ai for my partnership conversion and I'm really glad I did! They pointed out that I needed to file Form 8832 for entity classification since my business had been operating as a partnership but filing incorrectly. They also helped me properly allocate the beginning basis for each partner, which I would have definitely messed up on my own. The 1040X and 1065 process was way smoother with their guidance. And they caught that I needed to file Schedule H for household employees that I had completely overlooked. Honestly worth every penny for the peace of mind.

If you're having trouble getting through to the IRS to verify the correct procedure, I'd recommend Claimyr. I was stuck in a similar situation last year and couldn't get anyone at the IRS on the phone for weeks. Used https://claimyr.com and got connected to an IRS agent in about 20 minutes instead of waiting on hold for hours. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed exactly what needed to be done for my specific situation and even noted the case in their system so when my amended returns arrived, there was already documentation about the issue. Really helpful for complex amendments like converting from Schedule C to partnership.

I need to apologize for my skepticism about Claimyr. I was annoyed at having to amend my business partner's Schedule C and file our 1065, so I was in a bad mood when I saw the suggestion. But after wasting 2 hours on hold with the IRS yesterday, I tried Claimyr out of desperation. Got a call back in about 30 mins with an actual IRS agent on the line! They confirmed we needed to file both the 1040X and 1065, and also told us to include a statement explaining the situation with both returns. The agent also gave us specific advice about how to handle depreciation that had already been claimed on the Schedule C. Definitely worth it just to get clear guidance directly from the IRS.

Make sure you also consider the impact on estimated tax payments. When you switch from Schedule C to a partnership, the estimated payment requirements change too. Each partner will need to make their own estimated payments based on their share. If your client already made estimated payments for 2023, you'll need to address how those payments are allocated - they might have been made under the individual's SSN but now need to be attributed partially to the partner.

Just to add a data point - I did something similar last year and it took the IRS about 4 months to process both the 1040X and the 1065. Make sure your client understands the timeline and that they might get confusing notices in the meantime since the systems don't automatically connect the amendment to the new filing.

This is a complex situation that requires careful handling! A few additional considerations beyond what others have mentioned: 1. **EIN requirement**: The partnership will need its own EIN if it doesn't have one already. This should be obtained before filing the 1065. 2. **Partnership agreement**: Even though not required by law, having a written partnership agreement is crucial for determining profit/loss allocations, especially if it's not 50/50. Without one, the IRS assumes equal partnership interests. 3. **State filings**: Don't forget about state-level amendments! Most states will require their own partnership return and individual amendments. 4. **Self-employment tax**: Make sure you understand how SE tax changes. Partners in a partnership are still subject to SE tax on their distributive share, but the calculation method differs from Schedule C. 5. **Books and records**: The partnership needs to maintain separate books and records going forward, which is different from sole proprietorship record-keeping. I'd strongly recommend getting professional help for this conversion given the complexity and potential penalties involved. The IRS tends to scrutinize these types of corrections more closely.