LLC with spouse questions - what to claim where

[rwom1217]

Thanks.  Some functional questions...

- With a personal car used for business purposes, would I split the mileage based on our interest even though she did not do any actual business driving?

- In regards to deductions like mortgage interest as it relates to the home office.  It asks me to put in the amount from the 1098.  Would I split that?  It feels odd to do so because it is a specific number from an official document. 

      - On a related note, I assume I'd manually split points paid on a refi?

[Opus 17]

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@rwom1217 wrote:

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?

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I'm concerned about the prior question, "when I decide."

As mentioned by @Anonymous_ , you file Articles with the state to create the LLC but the state doesn't necessarily know your Operating Agreement which lists the members of the LLC and other legal matters.  If you don't have an Operating Agreement in writing, you should get a local attorney to help draft one, there are probably some standard things that need to be in there, especially in a community property state. 

It's important to understand that LLCs are created by state law and the IRS does not recognize them as separate entities.  Under federal tax law, you either have a partnership or a disregarded entity (sole proprietorship).  If a partnership, you file a 1065 unless you are in a community property state and the only partners are the spouses.  You can't flip-flop between a single member and two-member LLC.  Maybe you haven't thought this through thoroughly, but you need to do that soon, and get something in writing in case of audit.

Presuming this is a 2-member LLC with the only members being spouses in a community property state, you divide all your income and expenses exactly in half, even if that is not how the participation is divided. 

[Opus 17]

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@rwom1217 wrote:

Thanks.  Some functional questions...

- With a personal car used for business purposes, would I split the mileage based on our interest even though she did not do any actual business driving?

- In regards to deductions like mortgage interest as it relates to the home office.  It asks me to put in the amount from the 1098.  Would I split that?  It feels odd to do so because it is a specific number from an official document. 

      - On a related note, I assume I'd manually split points paid on a refi?

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In a community property state, if you file as 2 schedule Cs, you list the expenses and income exactly in half.

Regarding a home office, you would treat half the home office on spouse A's schedule C and half on spouse B's schedule C.  Suppose the total home office space is 10% of the house.  Put on your tax return that spouse A has a home office of 5% of the space and spouse B has an office of 5% of the space.  5% of the mortgage interest, property taxes, utilities and insurance are listed on spouse A's Schedule C, 5% on spouse B's schedule C, and the remaining 90% will go on Schedule A as personal mortgage interest. 

If you are asking, how to navigate the interview to get this result, I don't use this section of the program.  If you need more help than what I gave above, I can ask someone else who uses that section of the program more often. 

[rwom1217]

Yes, community property state, LLC with spouses as the only members (partnership).

I do need help with navigating the interview.  I don't know what it figures out based on the questions vs what I need to do manually.

For example, it asks about amounts from form 1098.  That is a specific number from an official doc.  I don't want to split that in half if I am not supposed to and have it look like I was being dishonest (even though it would not be in my favor to do so if I was not supposed to).

[Opus 17]

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@rwom1217 wrote:

Yes, community property state, LLC with spouses as the only members (partnership).

I do need help with navigating the interview.  I don't know what it figures out based on the questions vs what I need to do manually.

For example, it asks about amounts from form 1098.  That is a specific number from an official doc.  I don't want to split that in half if I am not supposed to and have it look like I was being dishonest (even though it would not be in my favor to do so if I was not supposed to).

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You have two separate businesses.  

You don't split the 1098.  If Turbotax asks, how big is the home office, use half the size for each spouse.  For example, a 2000 sq foot house with a 200 sq ft office, tell Turbotax that business A has a 100 sq ft office.  Enter the entire interest amount.  Turbotax will assign 5% of the interest to the office.  Same with all the other office expenses.  Then, when you go to business B for the other spouse, again indicate a home office of 100 Sq ft, and enter all the household expenses again.  Turbotax will assign 5% of the expenses to office B.

[rwom1217]

Thanks.  When entering the cost of the home, purchase date, etc.,  would I enter the original purchase info, or the info from our refinance?  Also, half of the amounts per business, or full amounts?

Some history in case it matters.  I alone purchased the home before we were married.  A couple years after getting married, we refinanced together.  The following year, we started the business.

[Rick19744]

We have responses on here that are not correct and are misleading:

• Community property state laws may vary and at this point we have no idea how the LLC was formed
  • It could be formed as John and Mary 100% owners / members
  • It could be formed as John 50% and Mary 50% owner / member
• The facts indicate that you "functionally" do everything
  • This is a big factor in how the return is completed
  • Take a look at the Schedule C instructions page C-3 under Community Property.
  • "If only one spouse participates in the business, all of the income from that business is the self-employment earnings of the spouse who carried on the business."  This is essentially what you are stating.
  • See the instructions for Schedule C page C-3 if you are NOT functionally doing everything.
• Revenue Procedure 2002-69 states "If a qualified entity (as described in section 3.02 of this revenue procedure), and the husband and wife as community property owners, treat the entity as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is a disregarded entity for federal tax purposes."
  • This is essentially how you are treating this regardless of how many Schedule C's you may be preparing for this disregarded entity.
  • This means that if you are functionally doing everything, since this is in a community property state and the LLC is jointly held, this LLC can be treated as a single member LLC (SMLLC); one Schedule C.
• You should meet with a tax professional since there are too many unanswered questions that have short- term and long-term tax and nontax implications.

[rwom1217]

"This means that if you are functionally doing everything, since this is in a community property state and the LLC is jointly held, this LLC can be treated as a single member LLC (SMLLC); one Schedule C."

This falls in line with what I was told when we started the LLC.  Does how the LLC was formed matter (100% vs 50/50) when treating it as an SMLLC doing a single Schedule C?

I intend to chat with a tax pro, I just honestly don't know if I can afford their full services.  I was ill for a quite a while and income from the business was less then anticipated.  Hence, me trying to do as much as I am able using this route.

[Rick19744]

Responses to your questions:

• You stated "Does how the LLC was formed matter (100% vs 50/50) when treating it as an SMLLC doing a single Schedule C?"  The answer is "no" for federal income tax purposes; since we are dealing with a community property state.
• You need to meet with the tax pro for the first year to make sure that you are starting down the right path.  Once you are heading in the right direction, you should be able to take it from there; assuming nothing changes.  Filing incorrectly can mean having to file amended tax returns, incorrect SS details for both of you, etc.  This first year is not a time to be penny wise pound foolish.
• Remember, you can only file a single Schedule C if you are the only member involved in the business; as your current facts indicate.  This forum isn't the place to be hashing this out back and forth.  Get professional input where you are able to have a one on one face to face discussion.

[rwom1217]

With creating an Operating Agreement,  is it sufficient to use something like eForms.com, or do I need to spend the extra on an actual attorney?

[Opus 17]

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@rwom1217 wrote:

With creating an Operating Agreement,  is it sufficient to use something like eForms.com, or do I need to spend the extra on an actual attorney?

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Since LLCs are under state laws, every state has different requirements.  I would always recommend an attorney.  Online forms may be ok if you have a basic understanding of what you need, but I wouldn't rely on them for something so important.  (However, if you start with some online forms, that process may ask you questions that prompt you to think about what your agreement should say, and that may streamline the process of consulting with an actual attorney.)