How to Handle Multi-Member LLC Deductions - K-1 vs Schedule C Filing Questions

Each member of your LLC will receive a Schedule K-1 that shows their share of the partnership's income, deductions, credits, etc. When filing your personal tax return (Form 1040), you'll report the amounts from your K-1 on various schedules. The K-1 income typically goes on Schedule E (Supplemental Income and Loss), not Schedule C. Schedule C is for sole proprietorships only. Since you're in a partnership filing Form 1065, each member will use the K-1 information on their personal returns. As for business expenses like mileage and equipment, these should generally be paid by and deducted at the partnership level on the 1065. The partnership deducts these expenses before calculating each partner's share of profits/losses. If you personally paid for business expenses, the proper way to handle this is to either have the LLC reimburse you (with documentation), or treat it as a capital contribution to the partnership. The only business expenses you'd claim personally would be "unreimbursed partner expenses" which have specific requirements and limitations, especially after the Tax Cuts and Jobs Act. These are much more limited than they used to be.

After struggling with a similar multi-member LLC tax situation last year, I discovered this AI tool called taxr.ai (https://taxr.ai) that really helped clarify things. I was confused about K-1 reporting and business expense allocation between partners too. Their system analyzed our operating agreement and explained exactly how our K-1 income should flow to our personal returns. It highlighted specific sections about expense handling that I hadn't even noticed before. They also provided personalized guidance on the proper way to handle those expenses I'd paid out of pocket without getting reimbursed by the LLC. The tool actually showed me why equipment purchases should be handled at the partnership level and explained how to properly document capital contributions when partners buy things for the business personally.

I wanted to follow up on my skeptical comment about taxr.ai. Despite my initial doubts, I decided to try it with our complicated LLC structure after struggling with conflicting advice from online forums. I was honestly shocked at how well it worked. I uploaded our operating agreement with its weird special allocation provisions, and the analysis correctly identified the potential §704(b) issues with our varying profit/loss percentages. It caught a major mistake I was about to make with recording guaranteed payments versus distributions. The tool gave me specific advice about documenting partner-paid expenses as capital contributions with clear templates for the records we need to keep. This saved me hours of research and probably thousands in potential audit issues. Definitely worth checking out if you're dealing with partnership tax complexities.

If you need to talk to an actual IRS agent about your LLC partnership questions (which I recommend), good luck getting through on the phone. I spent WEEKS trying to get clarification about K-1 reporting after getting contradictory advice. I finally used this service called Claimyr (https://claimyr.com) after seeing it recommended in another tax forum. They have this system that basically holds your place in the IRS phone queue and calls you when an agent is about to answer. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c I got through to a partnership tax specialist and had them walk me through exactly how to handle our LLC expenses and K-1 reporting. The agent confirmed what others are saying - business expenses should go on the 1065, not individual returns, and explained the proper documentation for capital contributions when partners pay expenses personally.

Just wanted to follow up on my skeptical comment about Claimyr. I ended up trying it because I was desperate to get clarification on our partnership's home office deduction situation and couldn't waste another day on hold. I'm actually kinda embarrassed by how wrong I was. The service worked exactly as described. I entered my info, their system called the IRS, and about 1.5 hours later I got a call saying an agent was about to pick up. I connected and got my questions answered about how to properly document home office expenses at the partnership level versus the individual level. Saved me from making a potentially expensive mistake on our 1065. The IRS agent was super clear that home office deductions for partners need to follow specific rules and should generally be handled through the partnership rather than individual Schedule C forms. Definitely clearing up the confusion from my research.

One thing nobody's mentioned yet - if your LLC has elected to be taxed as a corporation (filing Form 8832), then everything I'm seeing here about K-1s doesn't apply to you. In that case, the LLC would file a corporate return (1120 or 1120-S) and the rules are totally different. OP, you mentioned filing 1065 and K-1s so I assume you're being taxed as a partnership, but just wanted to clarify in case you're actually considering the corporate taxation route.

Sorry to add complexity, but watch out for state-specific LLC taxes too! My multi-member LLC had to pay an annual LLC fee in California ($800 minimum plus more based on income) that was separate from our personal income taxes. Each state has different requirements.

This is such a common confusion point for new LLC partnerships! I went through the exact same thing last year with my business partners. Here's what I learned the hard way: The key thing to remember is that with a multi-member LLC taxed as a partnership, ALL business activities and expenses should flow through the partnership (Form 1065) first, then get allocated to partners via the K-1s. So for your car expenses and equipment purchases - these should ideally be paid by the LLC directly and deducted on the 1065. If you paid out of pocket, you have two clean options: 1) Have the LLC reimburse you with proper documentation (receipts, business purpose, etc.), or 2) Treat your payment as a capital contribution to the partnership. What you DON'T want to do is try to deduct these on your personal return alongside your K-1 income - that's mixing partnership and sole proprietorship tax treatment, which can create problems. One practical tip: Set up a clear expense reimbursement system now. We created a simple process where partners submit expenses monthly with receipts, and the LLC cuts reimbursement checks. Makes everything much cleaner at tax time and creates the paper trail you need if you ever get audited.

Miguel, don't feel embarrassed at all - partnership taxation is genuinely complex and your questions are spot on! I went through this exact same confusion when our small consulting group formed an LLC. You're absolutely right that you'll file Form 1065 and each partner will get a K-1. When you file your personal 1040, the K-1 income/loss goes on Schedule E (Supplemental Income), NOT Schedule C. This is a crucial distinction - Schedule C is only for sole proprietorships. For those business expenses you mentioned (car, equipment), here's what I learned: these should be handled at the partnership level on the 1065, not on your personal returns. The partnership takes the deduction, then your share of the reduced profit flows to your K-1. If you've already paid for business stuff personally, you have two clean options: 1. Have the LLC reimburse you (with receipts and documentation) 2. Treat it as a capital contribution to the partnership Either way, the deduction happens on the 1065. Don't try to deduct business expenses on your personal return while also reporting K-1 partnership income - that mixes two different tax treatments and can raise red flags. My biggest recommendation: set up an expense reimbursement policy in your operating agreement ASAP. It'll save you headaches down the road and create the paper trail you need for tax compliance.

I just went through this exact situation with my 4-member LLC last tax season and wanted to share what worked for us! The learning curve is steep but totally manageable once you get the basics down. First, you're on the right track with Form 1065 and K-1s. Each partner reports their K-1 income on Schedule E of their personal 1040 - definitely NOT Schedule C. I made that mistake initially and had to amend my return. For business expenses paid personally, we developed a simple system: anything under $100 gets submitted monthly for reimbursement with just a receipt and quick description. Larger expenses need pre-approval via our group chat. The LLC reimburses within 30 days and takes the deduction on the 1065. One thing that really helped us was opening a dedicated LLC business account and credit card right away. It makes tracking partnership expenses so much cleaner than trying to sort through personal purchases later. Also, don't stress too much about getting everything perfect in year one. We made some mistakes with expense categorization and documentation, but we learned from them and tightened up our processes. The important thing is establishing good habits early and being consistent about separating partnership business from personal finances. Your friend group LLC sounds like it's starting off on the right foot by asking these questions upfront!