Did I make a mistake?

[BHoffman]

Mr. and Mrs. Smith are trustees of their husband and wife revocable living trust.

They formed an LLC in AZ (a community property state).

The members of the LLC are shown as:

Mr. Smith Trustee of the Mr. and Mrs. Smith Revocable Living Trust*and Mrs. Smith Trustee of the Mr. and Mrs. Smith Revocable Living Trust.

They bought a commercial office building for their business and put it in the LLC in 2014. *It's a self rental but that doesn't matter....

I figured the Trust was the sole member of the LLC and reported the rental activity on their Schedule E in the 1040 form.*

They want a loan. *The bank is asking for a tax return for the LLC. *I'm expecting they will want to see a form 1065.

Can I amend the 2014 form 1040 to remove the Schedule E and then prepare a (late) form 1065 listing the Husband and Wife trustees as multi-members if the bank insists?*

*

[Jiggers]

I think you need to see the LLC documents and how did it elect to be taxed.

[TaxGuyBill]

The clients should tell the bank that the LLC is on their Schedule E, and give that to them. They can show that the LLC's income and expenses are reported there. If they question it being on the 1040, the clients would give a copy of page 12 and 13 of the Instructions to Form 1041. Here are a few things they could highlight:

"In general, a grantor trust is ignored for income tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor. This also applies to any portion of a trust that is treated as a grantor trust."

"How to report. If the entire trust is a grantor trust, fill in only the entity information of Form 1041. Don't show any dollar amounts on the form itself; show dollar amounts only on an attachment to the form. Don't use Schedule K-1 (Form 1041) as the attachment."

"Generally, if a trust is treated as owned by one grantor or other person, the trustee may choose Optional Method 1 or Optional Method 2 as the trust's method of reporting instead of filing Form 1041. A husband and wife will be treated as one grantor for purposes of these two optional methods if:
All of the trust is treated as owned by the husband and wife, and
The husband and wife file their income tax return jointly for that tax year."

"Optional Method 1. For a trust treated as owned by one grantor or by one other person, the trustee must give all payers of income during the tax year the name and TIN of the grantor or other person treated as the owner of the trust and the address of the trust." (Because all income is reported directly on the 1040).

[Gretel]

I agree with TaxGuyBill that the bank should be satisfied with Schedule E. However, a 2 member LLC, even if husband/wife is required to file form 1065. What I do not know is if a community property state changes this requirement.

[Burke]

I agree with BHoffman in that the Trust is the sole owner of the LLC. It just happens to have 2 trustee's. And the Trust is disregarded only for tax purposes, not for legal purposes. The LLC should have just shown the Trust's name when it was formed.

[BHoffman]

I agree with BHoffman in that the Trust is the sole owner of the LLC. It just happens to have 2 trustee's. And the Trust is disregarded only for tax purposes, not for legal purposes. The LLC should have just shown the Trust's name when it was formed.

Whew! When it comes to Trusts, I take Burke's advice to the bank and back