LLC with spouse questions - what to claim where

[rwom1217]

My wife and I have a home business.  It is a side gig--my regular FT job is outside the home.  In our state, it is considered a single-member LLC, so taxes are filed jointly.  Practically speaking, I do all of the work.  Should I be splitting everything 50/50 in regard to income, expenses, inventory, etc?  On a related note, when it asks if I "share this home office," what would be the correct answer?

[Bsch4477]

Complete 2 Sch C forms splitting income and expenses with your wife. That way each of you will get credit for your social security tax payments which are part of your self employment tax.  You are not sharing the home office. You claim half and she has half accounted for in your separate expenses on your separate Sch C’s. 

[rwom1217]

What about her actively participating?  Functionally, I do everything.

[Rick19744]

I think it would be good to know your state of residency to confirm that you are eligible to file as noted by @Bsch4477 and that this LLC is jointly owned.

It's always good to start down the correct path.

[rwom1217]

Additionally, when it is asking about things like mortgage interest and real estate taxes, do I put half of the total on each of our forms, or do I put the full amount on both and the program figures it out?

Similarly, do I enter the full square footage of the home office on both, or half of total on each?

[Opus 17]

No no no stop.

More information is needed. 

"it is considered a single-member LLC" makes no sense.  Either you went to the secretary of state and filed paperwork to register as a single member LLC, or you did not.  If you did not specifically register as an LLC, you are not an LLC.  You are an unincorporated/simple sole proprietorship.  If you did register as an LLC, then the membership is determined by what you put on the papers.  If you included your wife then it is a two member LLC; if you only listed yourself it is a single member LLC.  Nothing is automatic or assumed, it depends on what paperwork you actually filed with the state government.

If you registered as a single member LLC, then:

All the business is reported on your schedule C ONLY.  If your spouse materially participates, you can either:

1. pay her a wage that reflects her participation and issue her a W-2, or

2. make her a subcontractor, pay her for her participation, and issue her a 1099-NEC.  In this case, you report the all the expenses of the LLC on your schedule C, and she will have a separate schedule C and will only report the expenses that she particularly incurred while performing her subcontracting duties.  Her business (as a subcontractor) is completely separate from your business.  

The payment you make to her as wages or a subcontractor is, of course, one of your deductible business expenses.

If you are not registered as an LLC or S-corporation, then you have these options:

1. You report 100% of the business and you pay her a wage and issue her a W-2 as described above, or

2. You report 100% of the business and make her a subcontractor and issue her a 1099-NEC as described above, or

3. The two of you file as a qualified joint venture.  Each spouse files a schedule C in their own name to report their share of the business income and expenses.  It might be 50/50, or it might be something else, depending on how the work load and duties is actually divided. (Note that if you are in a community property state, you must divide the income and expenses 50/50 even if that is not how the work is divided.)

If you registered as a 2-member LLC with your spouse as the other member, then:

1. If you live in a community property state, you file 2 schedule Cs each listing half the income and expenses, even if the work is divided unevenly.

2. If you do not live in a community property state, you file a form 1065 partnership tax return for the partnership.  The 1065 lists all the partnership income and expenses.  As part of filing the 1065, each partner gets a form K-1, listing their share of income and expenses, and the K-1 is added to the person's regular tax return along with any other income and expenses.  The income and expenses on the K-1 can be divided by percentage of effort, it does not have to be 50/50.  Form 1065 for a partnership was due March 15, not April 15, unless you got an extension (and the extension for form 1065 is different from the extension for form 1040).  The late fee for filing a 1065 late is $195 per month per partner. 

[Opus 17]

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@Bsch4477 wrote:

Complete 2 Sch C forms splitting income and expenses with your wife. That way each of you will get credit for your social security tax payments which are part of your self employment tax.  You are not sharing the home office. You claim half and she has half accounted for in your separate expenses on your separate Sch C’s. 

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If this is a single member LLC, they do not file 2 schedule Cs and divide the business, no matter what state they live in.  They can only file as a qualified joint venture if the business is not registered as an LLC.  If is it is registered as a two-member LLC, they also don't file 2 schedule Cs unless (and only if) they are in a community property state.

[Anonymous_]

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@Opus 17 wrote:

If you did register as an LLC, then the membership is determined by what you put on the papers.  If you included your wife then it is a two member LLC; if you only listed yourself it is a single member LLC...

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That is not necessarily the case because the "papers" (aka Articles of Organization) filed with the state typically only require the name of the person registering the LLC, the agent for service of process, and the name of a responsible party for the LLC (i.e., a person who is authorized to legally bind the LLC). 

Merely by reviewing the Articles, you would generally have no idea whether the LLC has one member or a thousand. Information of that type is usually found in the Operating Agreement, which is not filed with the state.

You're most likely conflating the procedure for obtaining an EIN from the IRS for the LLC with the state registration process. With respect to the former, the IRS does require the applicant to designate whether the LLC is a single-member or multiple-member LLC.

[Opus 17]

@Anonymous_ 

Thanks for the clarification.

I still think the in the statement "In our state, it is considered a single-member LLC" makes no sense with respect to "considered."  Either it is, or it isn't, based on the Operating Agreement (assuming @rwom1217 has one).

My guess is that @rwom1217 is confusing a sole proprietorship with an LLC and that Articles were never actually filed, because if they were, he would have just said so.  I think they are confused because a SMLLC and a sole proprietorship usually file the same kind of tax return.  But once you bring in a second person who participates in the business, it starts to matter very much exactly how the business was filed, or not filed. 

But only they can clarify. 

[Anonymous_]

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@Opus 17 wrote:

But only they can clarify. 

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I agree; that initial statement is ambiguous and needs clarification.

One thing is apparent from the original question is @rwom1217 purportedly "does all the work". As a result, if there is no LLC a QJV won't work (technically) since @rwom1217's wife does not materially participate. 

It appears as if the yield here, assuming a joint return, is there is little impact in terms of reporting, regardless, other than @rwom1217's wife getting credit for Social Security and Medicare.

[rwom1217]

We are in a community property state.  The Entity Type on our associated .gov website has us listed as a "Domestic LLC," with my wife and I as the Members.

My wife does not materially participate, hence some of my questions.

[Anonymous_]

I have to presume the ".gov website" was where you received the EIN for the LLC. 

Regardless, Rev. Proc. 2002-69 allows filing as a partnership (Form 1065) or as a disregarded entity.

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

[rwom1217]

The site was state level, not federal (we do have an EIN though).  I am researching whether to file as a partnership or disregarded entity.  When I make the decision, where in TT do I tell it which of the two (or does it figure it our automatically based on me answering the programmed questions)? 

[rwom1217]

If going the separate schedule C's route, when it comes to using a personal vehicle for the business, would I still split the miles in half between us, even though she did not do any business related driving?

[Anonymous_]

The program will not allocate automatically when a separate Schedule C is filed.