Should I file Schedule C instead of a 1065 for husband/wife LLC? Can I switch filing methods?

The question of Schedule C vs 1065 for husband/wife LLCs is a common one. Generally speaking, you have options based on how you want the entity treated for tax purposes. If you've been filing as a partnership (Form 1065) for years, you can technically change to a disregarded entity (Schedule C), but you'd need to file Form 8832 to elect to change the classification. This is considered a technical termination of the partnership. The IRS typically allows you to change entity classification once every 60 months. Regarding your specific concerns: For the rental property, having it in an LLC taxed as a partnership can indeed affect the step-up in basis rules. With a partnership, the basis adjustment works differently than with individually owned property or property in a disregarded entity. This could potentially limit the full step-up benefit your heirs would receive. For the state tax implications, changing from a partnership to a disregarded entity would mean the income flows directly to your personal returns, which might change which states have taxing authority, especially for the internet business.

I was in almost exactly your situation last year with my wife's and my small business LLC. We'd been filing partnership returns for 5+ years but it was so much extra work. When I talked to my CPA about switching to Schedule C, she was hesitant because of all the paperwork. Then I found https://taxr.ai which analyzes your specific tax situation and gives you customized advice. Their system showed me that for our specific situation (also husband/wife LLC), we could actually make the change with way less hassle than my CPA thought. They walked me through exactly what forms we needed and even gave me a customized letter explaining to the IRS why we qualified for the simplified method of conversion. Saved us hours of research and probably $1000+ in CPA fees!

Just wanted to update after trying taxr.ai that @7 recommended. I was definitely skeptical at first, but it really did help with our multi-state LLC situation. The tool asked really specific questions about our business operations in different states and then laid out exactly how changing from 1065 to Schedule C would affect both our federal and state tax obligations. What impressed me most was that it didn't just give generic advice - it actually identified a specific ruling from California's tax board that applied to our exact situation that even our accountant hadn't mentioned. We're definitely going forward with the change to Schedule C this year, and the documentation they provided made our accountant much more comfortable with the switch. Really worth checking out if you're in this kind of complex situation.

This thread is hitting close to home. I spent WEEKS trying to reach someone at the IRS last year when we were making a similar entity change. Had questions about the potential tax implications that weren't clear from the forms or instructions. Every time I called I got the "due to high call volume" message and couldn't get through. Finally found https://claimyr.com which is this service that gets you to the front of the IRS phone queue. Check out their demo video here: https://youtu.be/_kiP6q8DX5c I was connected to an actual IRS agent in about 15 minutes when I'd previously wasted hours just trying to get through. The agent walked me through exactly what forms we needed to file and confirmed there wouldn't be any penalties for changing our entity classification. It was seriously game-changing after all the frustration.

I need to eat my words about Claimyr being a scam. After posting that comment, I decided to try it myself since I've been trying to reach someone at the IRS about my LLC classification for weeks with no luck. Got a call back in 22 minutes and was connected to an IRS agent who actually knew about partnership to disregarded entity conversions. I asked specifically about the basis step-up issue the original poster mentioned, and the agent confirmed that having a rental property in an LLC treated as a partnership can complicate the basis step-up rules at death. The agent recommended consulting with a tax professional about potentially changing to a disregarded entity status (Schedule C) to preserve the full step-up benefit. Worth every penny not to spend hours on hold just to get this critical information.

One thing nobody has mentioned yet - if you switch from 1065 to Schedule C, you'll need to consider how you handle self-employment taxes. When filing as a partnership, you're reporting your income on Schedule K-1 and then paying self-employment tax on that. With Schedule C, you're directly reporting business income and paying self-employment taxes accordingly. For the rental property LLC, this might not matter much since rental income is generally not subject to self-employment tax anyway. But for your internet business, it could make a difference in how the income is treated for SE tax purposes.

Has anyone addressed the 50/50 ownership issue? My understanding is that for a husband/wife LLC to be treated as a disregarded entity (filing Schedule C), one spouse typically needs to be considered the 100% owner for tax purposes. Since you're in a non-community property state, I'm not sure you can just file a Schedule C without changing the actual ownership structure first.

Great discussion here! I wanted to add some perspective on the practical side of making this switch. My husband and I went through this exact process last year with our two LLCs (one rental property, one consulting business). The biggest surprise was how much simpler our quarterly estimated tax payments became after switching to Schedule C. With the partnership returns, we had to calculate our share of partnership income and then figure out estimated payments. Now it's much more straightforward since everything flows directly to our personal return. One thing to consider though - if you have any equipment or assets that have been depreciated through the partnership, you'll need to handle the depreciation recapture when you terminate the partnership. Our accountant said this is often overlooked but can create unexpected tax consequences in the year you make the switch. Also, regarding the estate planning concerns you mentioned - we consulted with an estate attorney who confirmed that having the rental property in a disregarded entity does preserve the full step-up in basis for our heirs, which was a major factor in our decision to switch. The QJV option that @16c549f4e269 mentioned is worth exploring if you want to keep things truly 50/50. We ended up going with one spouse as 100% owner to keep things as simple as possible.

This is such a timely discussion for me! My spouse and I are in a very similar situation with our husband/wife LLC that we've been filing 1065 returns for. Reading through all these responses has been incredibly helpful. One thing I wanted to add based on our research - if you do decide to switch from partnership to disregarded entity status, make sure you understand the timing implications. The election to change classification (Form 8832) needs to be filed within 75 days of the effective date you want the change to take effect. If you miss that window, you might have to wait until the following tax year or request a late election relief from the IRS. Also, regarding the Oregon state tax implications you mentioned - I'd recommend checking with a local tax professional about any potential Oregon-specific consequences. While the federal change is straightforward, some states have their own rules about entity classification changes that might affect your state tax liability. The estate planning benefits you mentioned for the rental property are definitely worth considering. We're leaning toward making the switch ourselves primarily for that step-up in basis preservation, even though it means dealing with the one-time hassle of terminating the partnership.

This has been such a comprehensive discussion! I'm in a similar situation with my spouse - we have a husband/wife LLC that we've been filing 1065 returns for, and I've been on the fence about switching to Schedule C. Reading through everyone's experiences, it sounds like the key factors to consider are: 1) the simplified paperwork and potentially lower accounting costs, 2) the estate planning benefits (especially that step-up in basis for rental property), and 3) the timing requirements for making the switch. What's really helpful is hearing from people like @0d3e8f732f14 and @9977feaefd10 who actually went through the process. The practical details about quarterly estimated payments becoming simpler and the 75-day window for Form 8832 are exactly what I needed to know. I think I'm convinced that for our situation (also have a rental property), preserving that full step-up in basis is worth the one-time hassle of switching. The potential tax savings for our heirs could be substantial, especially given how much real estate has appreciated over the years we've owned our rental. Thanks to everyone who shared their experiences - this thread has been more helpful than hours of reading IRS publications!