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8832 the correct form? How do ensure the effecitve date will be at the beginning of 2017? Will our EIN change?

My wife and I have an LLC in California, that was elected as a partnership. We would like to convert it to a disregarded entity. I want to confirm that 8832 is the correct form. Also, when do I file 8832 so that the change is effective for January 1, 2017? 

Will there be any tax consequences? All we want is to eliminate filing the other tax forms relating to a partnership.

Will our EIN need to change? https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-a-new-ein didn't explicitly answer my question. If a new EIN will be needed, when do I apply for one?

Other information that may be useful. We always file as a joint couple on our 1040. This LLC is for real estate.

thank you in advance.

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3 Replies

8832 the correct form? How do ensure the effecitve date will be at the beginning of 2017? Will our EIN change?

Since you reside in California, which is a Community Property state, and as your LLC is co-owned by two partners who are in fact married spouses, you should not file a Form 8832 at all, nor should you be filing a Form 1065 as if you were a partnership or LLC.  

This answer is only appropriate to the case where an LLC is co-owned by a married couple residing in one of the nine states with Community Property laws.

    Please see below why it is that both spouses must file Schedule C and Schedule SE if the entity is organized as an LLC but because only two partners exist and the two partners are a married couple and the residence is in a Community property state and the couple chooses to file not as a Partnership (Form 1065) but as Sole Proprietors.

    =====================================================================================

    As of 2007, any married couple living in a community property state who own, jointly and participate jointly an LLC may still consider the LLC to be a "disregarded entity"  - called an SMLLC (single member llc), and each then can avoid filing a Form 1065 or other return and simply file, each, a Schedule C and SChedule SE to their joint or separate Form 1040s.  For authorization, please read the citation incorporated below.

    Who is eligible to file as dual Sole Proprietors and not require filing a Form 1065? 
    >>>>>>Married taxpayers who are domiciled in one of the following community property states:

    • Arizona,
    • California,
    • Idaho,
    • Louisiana,
    • Nevada,
    • New Mexico,
    • Texas
    • Washington, or
    • Wisconsin.

    Note that you allocate the income and deductions between the two Schedules C (and the resulting SE) according to some logical method.  This way both spouses achieve their individual Social Security paid quarters status [and of course pay SE taxes!] 😉   - since FICA and Medicare goes to the individual credit and not the married couple as a couple.

    BUSINESS product is not needed! 

    Any personal product will do - buy ANY version of personal product, preferably the DESKTOP -  - and you can choose any version - although the basic is too basic for most - all versions produce the same forms - if unfamilair with Schedule C, may be best to pay the additional cost of H&B

    Can a husband and wife run a business as a sole proprietor or do they need to be a partnership? 

    It is possible for either the husband or the wife to be the owner of the sole proprietor business. When only one spouse is the owner, the other spouse can work in the business as an employee. If a married couple who file a joint tax return elect to conduct their business activities as a qualified joint venture, (a trade or business entity in which the husband and wife materially participate in such venture - see citation above as this is allowable for Federal taxation purposes only in Community Property states), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture. This is effective for taxable years beginning after December 31, 2006.

    Sec. 8215 of the "Small Business and Work Opportunity Act of 2007" (4/25/07)  allows disregarded entity treatment of what it refers to as a qualified joint venture which "means any joint venture involving the conduct of a trade or business if (A) the only members of such joint venture are a husband and wife,(B) both spouses materially participate (within the meaning of section 469(h) without regard to paragraph (5) thereof) in such trade or business, and (C) both spouses elect the application of this subsection.” Assuming an LLC is a qualified joint venture, this new law is effective for taxable years beginning after 12/31/2006. 

    Spouses Partnership May Elect Out of Partnership Rules - Under the Act for tax years beginning after Dec. 31, 2006, here a qualified joint venture is conducted by a husband and wife who file a joint return for the tax year, the joint venture is not treated as a partnership for tax purposes. (Code Sec. 761(f)(1)(A), as amended by Act § 8215(a)) 

    All items of income, gain, loss, deduction and credit are divided between the spouses according to their respective interests in the venture ( Code Sec. 761(f)(1)(B) ), and each spouse takes into account his or her respective share of these items as if they were attributable to a trade or business conducted by the spouse as a sole proprietor. (Code Sec. 761(f)(1)(C)) Thus, each spouse will report his or her shares on the appropriate form, such as Schedule C. 

    A qualified joint venture means any joint venture involving the conduct of a trade or business if:

    1. The only members of the joint venture are a husband and wife, 
    2. Both spouses materially participate (under the Code Sec. 469(h) passive loss rules without regard to the rule that treats participation by one spouse as participation by the other) in the trade or business, and 
    3. Both spouses elect the application of this rule. (Code Sec. 761(f)(2)) 

    Notwithstanding other self-employment rules, each spouse's share of income or loss from a qualified joint venture is taken into account under the above rules in determining the spouse's net earnings from self-employment. (Code Sec. 1402(a)(17), as amended by Act § 8215(b)(1)) 

    Similarly, each spouse's share of income or loss from a qualified joint venture is taken into account under the above rules in determining the spouse's net earnings from self-employment for purposes of the social security benefits rules. (Act § 8215(b)(2)) Thus, each spouse will receive credit for his or her self-employment tax contributions for purposes of receiving social security benefits. However, this rule is not intended to prevent allocations or reallocations, to the extent permitted under pre-2007 Small Business Act law, by courts or by the Social Security Administration of net earnings from self-employment for purposes of determining Social Security benefits of an individual.

    If this posted response is useful to you, please click on the upraised hand in the lower left of this post. Thank you. Scruffy Curmudgeon--PFFM/ IAFF, retired FireFighter/Paramedic - Locals 718/30, Veteran USAR O3 AIS/ASA '65-'67


    NOT INTUIT EMPLOYEE
    USAR 64-67 AIS/ASA MOS 9301 - O3

    - Just donating my time
    **Say Thanks by clicking the thumb icon in the lower left corner -it means nothing but makes those than answer feel wanted.

    8832 the correct form? How do ensure the effecitve date will be at the beginning of 2017? Will our EIN change?

    Hello Scruffy, thank you for the detailed answer. Let me provide more details.
    The LLC has been filing 1065 since 2004.  Also the real estate rental income was mine even before we were married. I decided to create an LLC and included her name on the LLC.  Also, I am the only one who materially participates in managing the rental.

    So can I still change our tax classification from partnership to disregarded entity and remove her name from the LLC? If so, will our EIN change? Basically original question.

    8832 the correct form? How do ensure the effecitve date will be at the beginning of 2017? Will our EIN change?

    If you remove her name from the LLC, it automatically reverts to a Disregarded Entity and no elections need to be filed.  For simplicity, it would be ideal to do that on December 31st.

    If you remove her name from the LLC, no, the LLC does not need to get a new EIN.  However, for most purposes (other than having employees) when a Single-Member LLC is a Disregarded Entity, it should use YOUR Social Security Number or EIN rather than the EIN of the LLC (see the instructions for Form W-9, Part 1).
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