How do I change from a form 1065 partnership to a single member llc that would be reported on a schedule C?

[Wonderwoman49]

@Rick19744  Thank you so much for your guidance! I spoke to the Florida Department of State and we are able to  file an amendment to change the ownership from 2 members to 1 member and keep the same entity. 

I have our 1065 partnership return ready to file. Do you mean I have to extend it because we have not yet made the change with the Florida Department of State or would there be a different reason to file for extension? 

Thanks again!

[Critter-3]

You can file the final partnership return with the feds as FL doesn't have a partnership return to file.

The "amendment" the state was referring to is the annual registration for FL  and NOT the income tax return.  

[Rick19744]

So not sure when you spoke with Florida and when they indicated the change was effective.

Even if it is not effective 1/1/2021 I would file a final federal 1065; just know there may be some exposure depending on the response to my initial comment in this post.

Make sure you mark the return final along with the K-1's.

Make sure you reflect the liquidating distributions.

Make sure you understand the tax basis of any assets distributed.  There are specific rules in determining the basis of assets distributed.

[Wonderwoman49]

@Critter-3 

Yes, thank you, I should have clarified that. The amendment I was referring to is indeed the Annual report for the FL LLC.  My question was if I have to make the amendment in the annual report with the state first (changing from 2 members to single member), before I can file the final 1065 partnership return.  

[Rick19744]

@Wonderwoman49 See my previous response as I knew what you were referring to.

[Wonderwoman49]

@Rick19744  Thank you so much Rick! Sorry, I didn't see your reply earlier - I only saw the other person's reply. 

I will be sure to mark this year's return and K-1's as final. We are not required to file Schedule L, M-1 or M2 on form 1065, so I wonder if we would still need to reflect any liquidating distributions, since we were never required to report capital accounts?

Thanks again Rick!

[Rick19744]

You need to reflect the liquidating distributions on form 1065 Schedule K and K-1 with the appropriate code(s).

If this is Gal Gadot you should have a tax professional prepare your returns !!!!

Need some Wednesday humor.

[DanielV01]

@Wonderwoman49  Sorry, I am just now seeing your thread and am glad you have gotten assistance.  My only comment to add to what the others have already mentioned is that going forward, if the business continues to operate as an LLC, you don't have the option to elect that it is a qualifying joint venture.  The qualifying joint venture provisions apply when the self-employment income is not reconciled through an LLC (even though the LLC is a disregarded entity for tax purposes), unless you live in a community-property state.  Florida is not a community property state.

[Wonderwoman49]

Thanks so much Daniel! I appreciate your insight!

[nganha19]

Hi Daniel: can you please help me with this situation: She has two member partnership in 2019. In 2020 she became one member because end of 2019 the other member withdrew, but they did not do Final/Partnership return.

In 2020 the tax preparer did not know the withdrawal, and acidently filed 1065 with two member.

how can she amend 1065 for 2020 to become one member LLC so she can use schedule C , and not schedule K1? How can she just let the IRS to abort this 1065?

Thank you.

[DanielV01]

@nganha19

If the 2019 partnership return was not marked as a final return, then a final return must be done, if for no other reason than to distribute the remaining partnership assets.  If the 2020 partnership return has already been filed, the least complicated "fix" (in other words, the lesser of the evils), is to amend or supersede the 2020 return. 

This superseded return must be marked as a final return.  The Schedules K-1 must be marked as final as well.  As far as the split of income is concerned, the split can be weighted.  Most software has a feature that allows the preparer to state when the interest in the partnership changed.  In this case, on January 1 (presuming a 50/50 split), the interest was 50/50.  On January 2, the interest changed to 100-0.  This weighted split will produce a very nominal amount of income on the K-1 for the prior partner (basically 50% of 1 day's worth of gain or loss), and the rest of the income will go to the now sole-member.  Beginning 2021, this individual will be able to file Schedule C unless there is another change.

Another option is to try to supersede the 2019 return and make it a final, but if you've seen this thread, you will realize that doing so is complicated.  Plus, you then have to convince the IRS to annul the 2020 1065.  Then re-do everything on the Schedule C, and hope the IRS doesn't question everything in the process.  They could well question the recommendation I give also, but it will be much easier to prove with fewer "moving parts".  In addition, the result should be just about the same, since business expenses on the partnership return are essentially the same as as Schedule C, and from a partnership return the income that passes through will also be subject to self-employment tax, just as net income on a Schedule C.

[graceg777]

I have a  very similiar situation where there was 2 members partnership for rental property (which would be on Schedule E) only but in 2016 one member liquidated and his 50% of partnership basis was distributed to him on the K-1 but the K-1 was not marked Final.  Fast forward, the one single member continues  to file Form 1065 in 2017 and 2018 but he does not materially participate in real estate activities.  Can he continue to file Form 1065 as a single member LLC? Or is he subject to dissolving the partnership and filing Schedule E?  

Thank you

Grace 

[graceg777]

My reference to Schedule E was that not on Schedule C but two member LLC was proper on Form 1065.  

[DanielV01]

@graceg777  You might find TurboTax a little inadequate for your situation.  If the last year the partnership actually existed was in 2016, Form 1065 should not have been used at all in 2017 forward.  There may be a way for the software to prepare what you need to have done, but you really do need a quality professional to help you straighten out your situation, because it is several years old.

[graceg777]

Thank you Daniel and I agree!