Gang,

I will be speaking to my wife's accountant tomorrow afternoon, and should be able to get this question answered, but I figured I'd post here anyway because an answer sooner rather than later will help me sleep tonight if I know I can reduce my tax liability this year.

Wife has an LLC as of early last year (2016).  I've done her taxes for the past several years under the "business" section of Turbo Tax, and everything worked out well (she was a sole proprietor in years prior).  This year she decided to seek the advice of an accountant, because she wanted to form an LLC.  She has been working with said accountant exclusively -- I figured I'd handle our personal taxes, and her accountant could handle the LLC's taxes.  Thus, I haven't been involved.  

But she was issued a K1 showing income that the accountant generated as part of her LLC's paperwork for this year.  So now there is a nexus to our personal taxes, which is where my question lies.  All of the research I've done has led me to believe that, as a pass-through entity, we can claim the LLC's losses (ie business expenses) as well as the income.  

Is that correct?

In addition to claiming the K1 income amount on our personal taxes (well, personal that includes her LLC), can I also claim the LLC's business expenses?

The difference in our tax liability between the two is significant.... Which is why I'm asking.

If I cannot claim the expenses, then where exactly do the business' loses go?  When she was a sole proprietor, we claimed both, and it always helped reduce our tax burden.  If I am now only to claim her income, but not expenses, what on earth are the advantages of an LLC?

Thanks.

I don't have many expenses on my real estate LLC.  My accountant claims mortgage interest and property taxes.  The net flows to my personal income.  I'd assume any legitimate expense can/should be deducted.  Should be paying taxes on net income, not gross.

I haven't done my own taxes in 20 years.  I am a majority owner of an Scorp and a Single Member LLC.  My accountant does it all.  I would recommend you pay the extra to have the accountant do your personal in the future too.

The K1 isn't the business gross revenue it is the profit net of expenses.

This.

To further explain a LLC is like it is a person. It has income and expenses for the year.  At the end of the year a K1 is issued to the LLC owners which states the profit or loss of the LLC for the year. All of the LLC's income and expenses for the year are figured in to the number on the K1.

So no you do not deduct any expenses from the number on the K1. If you had expenses related to the business that were not paid by the LLC and you paid them personally you are doing it wrong. The LLC is a separate entity and should be kept separate.

I would recommend ditching turbo tax and having the accountant done everything for you. Turbotax works good when it is really simple but when it is not you need a pro. My accountant handles my two LLCs and charges me very little to do my personal return.

I'm also going to warn you of another hot topic recently.  You wife should be drawing a salary through the LLC versus paying herself straight up dividends.  Failure to draw a reasonable salary from pass through entities has been a hot topic with the IRS audit lately.

Now this brings up another problem where the corporation will have to pick up the employer taxes.  Granted, the IRS is looking for individuals dodging the employment taxes by letting the income flow through and paying themselves strictly via dividends.  You do not want to be on the wrong end of the Trust Fund Recovery Act penalties because the IRS rarely negotiates those.

Of course, I am assuming that the LLC elected to be taxed as an S-Corporation due to the K-1.  If it is a partnership, that is a whole different ball of wax since there can be self-employment taxes triggered by a partnership K-1.

An LLC is a state entity. The IRS considers all LLC net income as personal income.

Members of an LLC do not draw salaries.

An S corp is not an LLC. They are completely separate. An LLC can not elect to be taxed as an S Corp at the fed level.

The IRS treats an LLC as a partnership if more than one member or a sole proprietor if a single member. LLC rules vary by state because they are a state entity, not a fed entity. ALL net income passes directly to the personal income of a partner and self employment taxes must be paid.

The issue the OP might have is that his wife is buying wholesale and selling retail, he may not realize that Costs of Goods sold can only be deducted as expenses in the year they are sold retail. So he may think he has a bunch of expenses that need to be accounted for because she bought a bunch of stock, but they can only be counted as an expense in the tax year they are sold retail. But I am just guessing here because it is a common misconception.

The K1 should be net income after all expenses.

I've done my share of form 8832 then subsequent form 2553 elections to allow S corporation income tax treatment of Limited Liability Companies.  Granted, there may be other states that have different laws that preclude this from happening, but I can say with 100% certainty that I have done this in Louisiana many times since Limited Liability Companies became a thing.  It's usually done in the case of LLC's that would normally be partnerships, but every now and again, a disregarded entity elects S corporation treatment for federal income tax purposes to take advantage of the passive income.

You can do that in PA as well.

You should not post things you know nothing about. LLC's most certainly can be taxed as an S corp at the federal level. I have been doing so for ten years.

This is the form you fill out to make the S corp election. https://www.irs.gov/pub/irs-pdf/f2553.pdf

You have to make the election within the first 75 days of when the LLC was formed I think.

well I guess things have changed.

I didn't have that option

When did you do this? I don't know how long it has been an option but I know I did it ten years ago. It certainly wasn't a recent change if it was one. You might have been past the 75 day window?

I don't remember it was a long time ago, I may have been past the window and the accountant never mentioned it because past the window, or I simply forgot about it since I didn't opt for that. I don't know.

Sorry for the wrong answers. I hate it when I do that.

Forming an LLC generally can give you three different ways of being taxed if it is only your wife in the LLC and no one else.

1. Disregarded Entity - You would still complete the Schedule C on your tax return the way you have in the past.  Usually recommended if net income is going to be less the about $50k.
2. S-Corp - Over $50k.  Now, you will have to consider payroll, and all the additional time and costs associated with running it.  Also filing the quarterly payroll tax forms (more time and costs...especially if you have to pay said accountant to do this for you).  An S-Corp has a separate tax return (additional cost paid to accountant) and will end of providing a K-1 for you to file on your personal taxes.  As previously said, the K-1 reports all the income and expenses of the corporation and basically provides a net number.  
3. C-Corporation - If this is a small business, I would stay away from this.  And since you received a K-1, it is not a C Corp.

Don't be cheap. Just let the CPA handle it all going forward. It will be worth the peace of mind.

In Arizona, if she is the only one listed on the LLC, the business taxes have to be done on her schedule c. The only way you can file as a corp. is if there are multiple people listed on the LLC.

If your wife received a K1 her business is filling as a corporation and captured (or should have captured) all of the write offs. Which is okay if the business is being taxed at a higher rate. 

(I am neither a lawyer nor a tax professional)