T/S own Rev. Trust. Trust wholly owns LLC. LLC operates business. How to report Income? 1040 or 1065?
Pros—if you have a clear and well-supported answer, please share. If not, I’d appreciate refraining from unhelpful or judgmental commentary.
The taxpayer and spouse are the grantors and co-trustees of a Revocable Trust. The Trust wholly owns an LLC, which operates an Amazon FBA business. The taxpayer and spouse reside in a non-community property state, and no tax election has been made for the LLC.
Tax Filing Questions:
- Given this structure, should the business income be reported on T/S Schedule C Form 1040, or is a Form 1065 partnership return required?
- If reported on Form 1040, should there be two Schedule Cs—one for each spouse?
Key Considerations:
- The LLC is wholly owned by the Trust, making it a Single-Member LLC (SMLLC) and a disregarded entity for tax purposes. As a pass-through entity, reporting falls onto trust Trust
- Since the Trust is revocable, it is treated as a grantor trust for tax purposes, therefore disregarded entity as well, meaning the grantors (T/S) are required to report the income/loss of the LLC
- An LLC owned by a husband and wife in a non-community property state is typically considered a partnership and must file Form 1065
- However, since the LLC is wholly owned by the Trust (not directly by T/S), the IRS may still treat it as a disregarded entity, allowing income to be reported on Form 1040. An argument can be made where the true economic owners are T/S (via indirect ownership) and therefore, 1065 is required.
