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Am opening an LLC for Kumon Math and Reading Center. If I allocate Percentage ownership as 49% to my spouse, what tax implication would I have?

 
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4 Replies
rjs
Level 15
Level 15

Am opening an LLC for Kumon Math and Reading Center. If I allocate Percentage ownership as 49% to my spouse, what tax implication would I have?

If you and your spouse are both members of the LLC, then it is a multi-member LLC. If you do not live in a community property state, the multi-member LLC has to be treated as a partnership for income tax purposes. The LLC has to file a partnership tax return, Form 1065. The partnership tax return will include a Schedule K-1 for each member. You have to enter information from your Schedule K-1 in your personal Form 1040 tax return.


If you do live in a community property state, you have a choice about how to treat the LLC. One option is to treat it as a partnership, as described above. The other option, if you and your spouse are the only members of the LLC and you hold your interests in the LLC as community property, is to treat the LLC as a "disregarded entity." That means that you file your tax return as if the LLC didn't exist. You and your spouse would each file a Schedule C for your respective shares of the business income and expenses.


The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

 

Am opening an LLC for Kumon Math and Reading Center. If I allocate Percentage ownership as 49% to my spouse, what tax implication would I have?

We live in Florida where we need not pay income tax. Is there any benefit if I were to share % ownership with my spouse? One of the pitfalls was when I inquired in the bank, they need him if he has more that 10% stake at the company. I need to understand Federal tax implication or if there is any specific benefit in adding spouse to LLC at all? 

M-MTax
Level 11

Am opening an LLC for Kumon Math and Reading Center. If I allocate Percentage ownership as 49% to my spouse, what tax implication would I have?

On the downside, if your spouse and you are members of the LLC (a multi-member LLC), you will have to file a 1065 - partnership return - with the IRS each tax year. No filing will be required in Florida, however.

 

On the upside, multi-member LLCs provide asset protection whereas single-member LLCs in Florida do not.

 

Ref https://www.alperlaw.com/blog/single-member-llc-in-florida

 

If you're a single-member LLC, you might want to secure legal advice with respect to your choice of entity since you're in Florida.

Vanessa A
Employee Tax Expert

Am opening an LLC for Kumon Math and Reading Center. If I allocate Percentage ownership as 49% to my spouse, what tax implication would I have?

If you live in Florida, since this is not a community property state, then the tax benefits would depend on other things such as how you file, your overall tax situation and if he materially participates in the LLC.  If you file a joint return, there may be no tax benefits at all since the income will still be reported on your joint return depending on his participation level.

If you file separately, and he has additional income, this could have him pay more in taxes.  If he has no other income, it may not have any affect at all on your overall tax situation.
 

It would greatly depend on if he materially participated in the LLC.  If he does not, then this would be investment income on his side and his portion would not subject to Self-Employment Tax, whereas yours would be since you would be materially participating. 

 

"Material participation tests.

You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.

  • You participated in the activity for more than 500 hours.
  • Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
  • You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
  • The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
  • You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
  • The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
  • Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

 

You didn’t materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:

  • Any person other than you received compensation for managing the activity, or
  • Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services).

Participation.

In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity." Publication 925 

 

You can use TurboTax Tax Caster to play around with different scenarios to see how it will affect you when you enter all of your information. 

 

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