Filing Taxes as an LLC at Home

Question: I operate a small business out of my home and recently reorganized it as an LLC with partnership option. My wife and I are the sole members of the LLC. In the past, I took a home-office tax deduction on my Schedule C. Can I still take that deduction as an LLC? If so, where is it reported?

Answer: When you say that you’ve established a limited liability company, or LLC, with a partnership option, do you mean that you’ve elected to file a partnership tax return, rather than a corporate return? If so, your confusion is valid: The partnership tax return does not include a line where business use of the home is reported, as there is on Line 30 of Form 1040 Schedule C, said Donald Lucove, a certified public accountant at Calabasas-based Lucove, Say & Co.

“I suggest that you use Form 8829 [“business use of the home�] to determine the allocable amounts of home-office expense for your company. Then enter those expenses directly on the corresponding lines of the partnership tax return,� Lucove said. The partnership probably also will report its balance sheet on Schedule L, he added, so “these [home-office] amounts would be considered as additional capital contributed by you [on Schedule L] and on Line 2 of Schedule M-1.�

Your question raised a red flag: An LLC must have at least two members to be valid. “Since California is a community property state, we have received comments from the Internal Revenue Service that a husband-and-wife LLC is not proper unless both spouses are actually operating the business,� Lucove said.

The IRS classifies single-member LLCs as “disregarded entities.�

“A disregarded LLC does not file a federal tax return. [It] reports all activity on Schedule C of an individual Form 1040,� he noted. Talk to your CPA. If you and your wife are not both active partners of the LLC, determine whether your LLC will be disregarded by the IRS. If so, you should continue to file a Schedule C and Form 1040 tax return.

There’s another reason to verify the status of your LLC: “A disregarded LLC must file a California tax return [Form 568] and with it pay a mandatory minimum $800 fee,� Lucove said. Get the information and save yourself potential trouble down the line.

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Owning a Business Is No Weekend Hobby

Q: I’m thinking about purchasing a small retail business as a sideline. My goal is to reduce dependency on my current job security, and find something flexible that will allow me to spend more time with my family. What kinds of companies should I look at?

A: The most successful entrepreneurs work at their companies every day, especially if they’re in retail. Owning a business is not a hobby, said Bob Phibbs, owner of Retail Doctor, at www.retaildoc.com. “If you’re not at the business regularly, you are giving control over your investment to your employees -- people who are not necessarily invested in the company. It is a recipe for disaster,� he said.

No matter what kind of business an entrepreneur starts, it’s crucial that the entrepreneur has a passion for that industry and company. Enjoying the business means that the entrepreneur will have the stamina to put in the long hours needed to get a larger payoff down the road. Also, any business owner needs to calculate what her break-even point will be, when she’s likely to reach it and how she can reasonably expect to raise sales with a clear road map and a true commitment to the company.

“The business needs to be your baby,� Phibbs said. “No one is super human. Either stay with your job, or commit to this business. But don’t buy a business to allow you flex time. You’re playing with your savings, your reputation and your employees’ lives.�

All those things are too important to risk unless you’re serious about success.

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