How to file a Schedule C for a husband/wife LLC in a community property state? We are not a partnership. Also we'd prefer not to divide expenses & file two Schedule Cs.

[Carl]

you have two choices and no other really. Either you file two SCH C's as a part of your joint tax return. Or you can file a 1041 partnership return which will issue a K-1 to each partner which each partner will then use for completing their joint tax return.
Your only other option is to make it a sole proprietorship by removing one of the owners from the LLC. Then for example, in even numbered years the husband claims all the income and expenses and gets all the medicare and social security credit. THen in odd numbered years the wife owns it and she gets all the medicare and social security credit. Of course, that only balances out provided there is a real, taxable net profit every year. So that's why the 1041 partnership return may be the better (and easier in the long run) way to go.

[Opus 17]

You can't only file one schedule C.  You have to file one schedule C for each person considered "self-employed", and divide the LLC income and expenses equally, or you can get Turbotax for Business and prepare a partnership or corporate tax return for the LLC, which will give a K-1 statement for each owner that goes on your personal married filing joint tax return.

https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc

(Note for anyone who finds this question in a search: this choice is only allowed for a 2-spouse LLC in a community property state.  2-spouse LLCs in all other states must file as a partnership or corporation and can't use schedule C at all.)

[Taxathrone]

@Opus 17 and @Carl -- are you sure this is correct? (Or, at least, acceptable to the IRS?) That an unincorporated LLC wholly owned by spouses as community property in a community property state, if treated as a sole proprietorship, is filed on split Schedule Cs and SEs (one for each spouse)?

TurboTax indicates an unincorporated LLC wholly owned by spouses in a community property state is treated like how you mentioned (income split on Schedule Cs and Schedule SEs if treated as a disregarded entity), but IRS Publication 541, Partnerships says (under "Community Property") that "Spouses who own a qualified entity (defined below) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor."

...Nowhere else (that I can find) does the IRS mention this, and they still don't clarify how Schedule SE would be treated (one Schedule SE in the name of the spouse listed on the Schedule C or is income still split between spouses on Schedule SEs), but nowhere can I find that the IRS says to split Schedule Cs and Schedule SEs, either, as in your answer or how TurboTax indicates, which is really frustrating.

[Carl]

They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor."

Then the other spouse gets no credit on the federal return for social security or Medicare, and can not use any of the earned income towards their tax deferred IRA or ROTH contributions from the business earned income.

[Opus 17]

@Taxathrone 

See this IRS page

https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-compan...

A two-member LLC where the spouses are the only two members and in a community property state has 2 clear options.

1. File as a partnership on form 1065.

2. File as 2 disregarded entities on schedule C under revenue procedure 2002-69.

https://www.irs.gov/pub/irs-drop/rp-02-69.pdf

The third option you mention is more complicated.  Publication 541 and the revenue procedure both say that the IRS will accept the taxpayer‘s designation as either a disregarded entity or a partnership.  The question then is, who owns the business and how is ownership treated under state law.  (Because LLCs are created under state law but federal law does not recognize their existence, both unincorporated partnerships and partnerships structured as LLCs are treated the same at the federal level.)

Let’s consider a sole proprietorship in a non-community property state that is clearly owned by spouse A. However, spouse B participates in the business and should be entitled to a share of the income and the Social Security retirement and disability credits that go along with it.  If spouse A makes spouse B a partner in the business, they must file a form 1065 partnership return. However, spouse A can also employ spouse B as an employee or as a subcontractor. Some of the income of the business would be paid to spouse B which would be deducted as a business expense by spouse A and reported as taxable income by spouse B.

Publication 541 and the revenue procedure apply to both unincorporated partnerships and LLC‘s. The IRS position is that a business owned by two spouses in a community property state has a third option in addition to the two I listed above:

3. Report the entire business under one of the spouses.

Similar to the situation in a non-community property state, the participation of spouse B could be recognized by making spouse B an employee or subcontractor.

However, if the business has been organized as an LLC, then state law comes into consideration. It may be illegal under state law for the entire business to be reported under spouse A if both spouses are members of the LLC, even though it might be acceptable under to the IRS under federal law.  (In other words, a business owned by two spouses in a community property state that is not organized as an LLC under state law may have more tax flexibility than a business that is organized as an LLC under state law.)

For a truly definitive answer, you should seek out professional representation in your own state.

[Rick19744]

Essentially what is happening is that a married couple owning an LLC in a community property state is eligible to file a return as a qualified joint venture (assuming they meet all the requirements).

In general, an LLC is not eligible to make a qualified joint venture election to elect out of the partnership provisions.  The exception to the rule is for those married couples in community property states.

How to handle this is provided in IRC Section 761(f).

The IRS doesn't always provide clear guidance.

[Taxathrone]

Thanks so much, @Opus 17, for taking the time to go into that more detailed response about the three possible options for a two-member LLC where the spouses are the only two members and in a community property state, and why / how they exist. This extra context was very helpful, and I really appreciate it.

Thank you, too @Carl and @Rick19744 (and I wish the IRS provided clearer guidance!).