Discussion:Husband/wife members of LLC

Thanks, Larry

For any other type of business, the technical rule is that when a husband and wife own a business together, it is considered a partnership under tax law, unless another type of entity is elected, such as C or S Corporation. However, the IRS has recently ruled that if you are in a community property state, you can treat the husband and wife as one taxpayer for purposes of the single member LLC rules. See Rev. Proc. 2002-69, 2002-2 CB 831.

Therefore, if you are in a separate property state, the husband and wife are considered to own interests separately, i.e. now you have 2 members of the LLC. Technically, unless the exception above applies, the husband and wife are considered "partners" in business and a partnership tax return is required unless you elect to be a C or S Corporation. This may not be a bad thing. Yes, it does require an additional tax return, but it also allows each spouse to have potential SE income/wages towards future social security benefits. Some computer programs will not split the Schedule C income between each spouse and calculate SE tax on each spouses share.

With that said, practically, I have never seen the IRS pursue this technicality and I find my husband and wife business/rentals clients do not want to file the additional tax return. Also, except for maybe "basis" issues, I think the net effect on their joint tax returns is the same. I usually explain this to the clients, let them decide, then make notes to the file regarding same. Probably not the simple answer you were hoping for...

Also, most community property states have a provision which allows husband and wife to own separate property if they specifically designate as such.

Disclaimer - I am not an attorney, only a CPA citing what my experience has been. Also, I'm in Alaska, which is a separate property state. But, we do have a special "opt in" option for community property, where residents here can designate certain property as community property in the form of a written agreement or trust. We frequently consider the LLC issue when assisting clients with their "opt in" decisions plus I frequently deal with estates that have property in other states. We struggle with the community property issue since in many cases we want community property treatment due to the favorable tax basis step-up.

Bottomline: The attorney may be right. Maybe check with another attorney in the area to see if he/she agrees.

My answer would change if the property was purchased with community property funds.

Thank you!

John Huddleston Seattle Bellevue Tax Accountant

SMLLC and makes the mortgage payment out of the business checkbook. Since the bus is a SMLLC, sole P, and the Real estate is owned jointly outside of the LLC, does 1/2 of the mortage payment get reported a s Sch E income to the H, and 1/2 of the int and related depr get deducted on the Sch E? I always get confused, this is a community property state, so the H owns 1/2 of the real estate outside of the business. Since the H owns 1/2 of the real estate the wife on Sch C can not deduct his 1/2 against her SE income. I think to get out of this dilemma the H & W have to form a second LLC to hold the real estate, and choose to file a Form 1065 partnership return for the rental aspect.

Can a H & W in a community property state go into debt jointly to acquire a business and real estate, and have only one of the spouses report all of the assets, income, and expenses under their one schedule C business?

IN regards to a H & W scenerio, what if the business chooses SMLLC on Schedule C, and this first business rents real estate from the second LLC which owns the real estate? Would it be OK if the second LLC files a Partnership return? What if the second LLC also chooses to be treated as a SMLLC and report on Sch E?

I think in a community property state H & W scenerio you can choose to put everything, equipment and real estate, on one Sch C. If you want to use rent to reduce your self employment income you must form a second LLC and file a partnerhsip tax return.

I am not necessarily looking for an answer in so much as just a discussion,

Thank you, Tony

HR 2206 Sec. 8215 [Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28)] is confusing. What qualifies as a joint venture? Would a husband-wife LLC (non-rental, Ohio - not a community property state) file Schedule C or 1065?

1. This IRS page states, "A business owned and operated by the spouses through a limited liability company does not qualify for the election."

2. Yet the amendment to IRC 761 made by HR 2206 states that any husband-wife joint venture normally treated as a partnership (like the husband-wife only LLC) can elect to file as 2 sole proprietors.

Any advice?

Also, I take issue with Rev. Proc. 2002-69's continuance. If the two afford functionally identical treatment, but the RP does so without the participation requirement, community property states are given a generous tax advantage. Does anyone else see and agree?

Also, I take issue with Rev. Proc. 2002-69's continuance. If the two afford functionally identical treatment, but the RP does so without the participation requirement, community property states are given a generous tax advantage. Does anyone else see and agree?

I'm NYS as well and this is a messed up issue. I've done what others have mentioned and informed clients that they are technically supposed to file a partnership return or to file two sch C's. Although, in proseries, it allows you to click on the sch c that it is operated jointly by husband and wife, but the Sch F provides a warning when this is clicked. Proseries recommends splitting the Sch F into two separate Sch F's.

Just my 2cents

My husband and I have an LLC in CA; it was set up to hold real estate investments. For the purposes of the EIN, should I apply as a single-member or multi-member LLC?

Thanks

Client is in community state currently filing 1065 for last few years. My associate who will be taking over for this client is recommending to discontinue filing 1065 for 2007 and file 2 Sch C's to reduce accounting fees as main reason. How is this filing change made for IRS?

Option A: Mark final on 2007 1065 and attach stmt will begin filing 2 Sch C's due to community state in subsequent years?

      B:  File 2 Sch C's and attach stmt referencing 1065 Id will no longer be filed as result of community state?

FYI: 1065 is 50/50 ownership/earnings

Also Wouldn't it be better to just file 1 Sch C to avoid the extra work? OR As RLCPA states "to have allows each spouse to have potential SE income/wages towards future social security benefits."

Ick.

I have a couple with 2 rental properties & 1 they purchased to renovate & re-sell. My inclination is that with their planned level of activity, it should be filed as a partnership? The more I read on this the more confused I am. Seems "everyone" created an LLC this year! I used to think I knew the answere & would file a partnership return but after reading what others do, now I am not so sure.

Election for Husband and Wife Unincorporated Businesses

An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

A business owned and operated by the spouses through a limited liability company does not qualify for the election Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

From the IRS page cited above, I read this as: a H/W rental can file a single schedule E, and both get part of the SE earnings, however, only if they are NOT an LLC. So if you want the LLC protection, you need to file a partnership return. Is this the ruling in a nutshell?

If so, do you recommend to clients in this situation that they just buy the rental personally and get a good insurance policy, or do you recommend that they file the partnership return as an LLC? (I know you're going to say that the client needs to make this decision, but you know they will ask what you recommend anyway.)

If they file as an LLC, I assume they need to put the property in the LLC's name. Does the loan also need to be in the LLC's name?

Can I get a recommendation on the following situation?

I'm about to start a business that purchases small properties that need improvements. I'll make the improvements, then rent the property. I plan on creating an LLC. I'm concerned about protecting my personal assets. Almost all of my assets are jointly owned by my wife and I, with the exception of my 401(k) and pension. I'm still employed and expect to retire in a couple of years. I'm thinking about using my wife as the sole proprietor of the LLC with me as trustee. I believe that will protect any joint assets. Will that protect my 401(k) and pension as well? The only problem with this plan is that I am the primary earner in the family, so my income is critical to getting any loans.

Bottom line...I want to make sure that I protect all of our current and future (401K and pension) assets.

Thanks.

I think we also determined that LLCs don't qualify as QJVs.

but since you are new here, LN, and as of yet have no profile we can assume that you haven't been keeping up with our discussions. Try the yellow search box on the upper left. I'll give you enormous credit for searching and finding this thread.

in which case he should not be giving tax advice, he should be referring his legal clients to a local tax pro, just like we refer our tax clients to an attorney for their legal questions

(real estate refers to real estate to be held (office, rental, investment), not real estate to be sold in the course of business (flipping, rehab & sale, buider, developer) - that type of businss could be incorporated with no extra problems)