2 Member LLC, Start-up

[Don Hughes]

A 2 Member LLC was set up by our client as they travel around the country and dance. According to the LLC members, they feel their income ceiling is around $25,000 per year, if they do well. They have been dancing for many years as a fun hobby; this is a husband/wife thing. This year, $900 1099 received with expenses of $200,000+. They expect to NEVER have a profit. My understanding is that if there will NEVER be a potential for a profit, we deduct expenses to the extent of the income only. An LLC could be the chassis should they wish to file a 1065, but in reality, a Sch C would better serve the purpose. I have no comfort in filing a 1065 with a $200,000 expense against a $900 income when the taxpayer's have told me, in writing that they will NEVER turn a profit. I feel silly for even posting this but am looking to see if I am looking at this wrong, opinions or reference material please.  

[mcb39]

Two Schedule C returns filed as a Qualified Joint Venture LLC.

[Lion EA]

That only works in a community property state. Otherwise, an MMLLC files Form 1065, unless they elect to be taxed as a corporation.

If not entered into with a profit motive, follow the Hobby Loss Rules.

How could $200,000+ ever be usual & necessary for revenue of $900, especially with NO profit motive?!

Did they actually run their hobby income and expenses through the LLC bank account or LLC charge card?

If they paid their hobby expenses personally and deposited their hobby income into their personal account, then you report their hobby income on Sch 1 line 8. Hobby expenses are NOT currently deductible until the sunset of the TCJA. (After the TCJA sunsets, if Congress doesn't change the law, hobby expenses will be deductible -- up to the amount of hobby income -- in the 2% miscellaneous section of Sch A.)

[Lion EA]

Sch 1 Line 8 j

[Don Hughes]

Thank you once again for your assistance!!

[Lion EA]

Discuss with your clients WHY they formed a MMLLC. And, if they should dissolve it to save the cost of preparing Form 1065 in the future.

Did they watch a TikTok that told them they could write off anything in an MMLLC?!!

[Abby Normal]

I assume they did this so they could have an EIN and not have to give out their Social Security numbers to all of these contests. In my state, you don't say how many members are in the LLC you're forming, but when they applied for the EIN, I'm guessing they did tell the IRS that they had multiple members, and the EIN letter says the IRS is expecting a 1065.

Cheapest solution is to dissolve the LLC, form a new LLC and get a new EIN for a SMLLC that will be disregarded for tax purposes.

[mcb39]

I am finding people who do these dumb things on their own with no understanding of what they are getting in to. Example:  A couple who intends to paint houses; not married; has maybe painted one or two houses so far.  I refused to prepare the return because SHE already has an IRS debt and I cannot see any prospect of getting paid to prepare a 1065 and two 1040 returns.  Where do people get these ideas?  I believe it makes them feel important, but they have no clue what they are doing and seem to forget that, often, less is more.

[Lion EA]

It used to be the an individual could get an FEIN. That way, no LLC needs to be formed with whatever state fees are due at formation &/or annually to SoS &/or DRS.

[Lee B]

You just put your personal name on line 1 and your trade or business name on line 2,then on line 10 check  . . . . 

"Banking purpose.

Check this box if you're requesting an EIN for banking purposes only, and enter the banking purpose (for example, a bowling league for depositing dues or an investment club for dividend and interest reporting."