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drewnyc
New Member

If a spouse plans to become a member of wife's LLC's in California - what forms need to be filed? I assume no 8832 with the IRS as LLC is still a disregarded entity?

 
1 Reply
ScruffyCurmudgeon
Level 7

If a spouse plans to become a member of wife's LLC's in California - what forms need to be filed? I assume no 8832 with the IRS as LLC is still a disregarded entity?

NOTE:  Relevant only to spouses living in Community Property states.

The IRS has taken the position that an LLC owned by a married couple who do not live in a community property state must file as a partnership with Schedules K-1 distributing the income and deductions to the individual taxpayers by filing a Form 1065 with Schedules K-1 issued to each spouse.

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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.

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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" an - 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.

See the IRS instructions about dividing the items of income, gain, loss etc. - Your wife must file within the joint 1040 as if there was second Sole Proprietorship

>>>>>>>BUSINESS product is not needed in this circumstance (only).

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.

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The IRS has taken the position that an LLC owned by a married couple who do not live in a community property state must file as a partnership with Schedules K-1 distributing the income and deductions to the individual taxpayers by filing a Form 1065 with Schedules K-1 issued to each spouse.

Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
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-------------------------------------No Not an Intuit Employee - Just donating my time
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