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Level 1

How should a husband-wife LLC file?

My wife and I are the only members of an LLC.  Our CPA had us filing a Schedule C as a Sole Proprietor.  It's my understanding that is acceptable as a disregarded entity.  Is that correct? 

But TurboTax wants two Schedule Cs for a husband-wife partnership.  Note my wife owns 51% of the LLC.  Our CPA did one Schedule C with both our names as the proprietor.  But then he generated separate Schedule SEs per our percentage ownership.  I hope to start doing my own taxes using TT, but it may be too complicated.

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Accepted Solutions
Level 14

How should a husband-wife LLC file?

UPDATED JANUARY, 2019 for Tax Year 2018

LLC owned by married couples with only the married couple as partners.

SUMMARY and then COMPLEX ANSWER follow

SUMMARY:

  1. If a married couple are the two (and only two) owners of a LLC, but if they do not live in a Community Property State =AZ, CA, ID, LA, NV, NM, TX, WA, & WI - then they must file Form 1065 Partnership return first in order to produce the Schedules K-1 for each of the two partners.  

  2. If a married couple are the two (and only two) owners of a LLC, and they live in a Community Property State =AZ, CA, ID, LA, NV, NM, TX, WA, & WI -  and both participate materially in the business, then the following explantion provides the reason why the couple can avoid filing Form 1065 and instead file with their Form 1040 (joint presumably) and for each spouse produce a Schedule C and Schedule SE, simplifing the filing of taxes process.  See below for how to account each spouses Schedule C and Schedule SE.

    See shorter answers below if you undertstand the why you can or cannot file Schedule C and SE.

======================================================================================

Pardon the long-winded answer but it is a complex matter.

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

 I'll start with the IRS instructions that do allow you to elect to treat your SMLLC as a disregarded entity, and then follow with a much more detailed explanation.   Whether you may or may not take the election discussed is a matter of controversy in non-community property states.  Please see the discussion at the end.

 Husband-Wife - Qualified Joint Venture [for real estate ventures- see below]

http://www.irs.gov/instructions/i1040sc/ch01.html

NOTE WELL (N.B.): ====BUSINESS product is not needed!

Home & Business produces Schedule C - preferably the DESKTOP

Can a husband and wife, both residing in a Community Property state, run a business as a sole proprietor or do they need to be a partnership?

  • If you and your spouse each materially participate (see Material participation, later, in the instructions for line G) as the only members of a jointly owned and operated business and you file a joint return for the tax year, you can accept the IRS' default designation of your LLC (owned by a married couple, only members, Community Property State residents) as a "disregarded entity."   This means, that given the particulars as stated, your partnership status (the dual member LLC) is disregarded.  The IRS designates your business as a Qualified Joint Venture.  You both are treated as Sole Proprietors.  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), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture. Of course, being in a community property state will obviously have an impact on distribution of the LLC membership interests in the event of a dissolution of the marriage.

  • Alternatively, if a married couple, each participating materially, and being the only two partners in an LLC, and living in a Community Property State, may choose to be treated as a partnership with responsibility to file a Form 1065 for the LLC and then file their Form 1040 inclusive of the Schedule K-1(1065) each receives.  This requires a prior election to be treated as a partnership for tax-filing purposes. Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.   So by March 15th of a year it is too late to so elect for the prior year.  However, you can file your Form 8832 to elect to not be a disregarded entity status going forward.  Attach a copy of your Form 8832 to your partnership tax return when you file it.

  • 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. 
 Please note that there are discrepancies between various IRS publications as to the matter of whether or not living in a Community Property State [e.g.,AZ, CA, ID, LA, NV, NM, TX, WA, & WI] is a requirement that would allow "disregarding" the LLC partnership and filing simply as two sole proprietors on two Schedule C  forms.  However, the appropriate path is to assume that the three points above apply.
-----------------------------------------------------------------------------------------------------------------------------------

How to account for dual Schedules C and SE 
You must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C, C-EZ, or F. On each line of your separate Schedule C, C-EZ, or F, you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE to pay self-employment tax, as applicable.

 For more information on qualified joint ventures, go to IRS.gov. Enter “qualified joint venture” in the search box and select “Election for Husband and Wife Unincorporated Businesses.”

----------------------------------------------------------------------------------------------------------------------------

Commentary on whether or not community property state residence is required may be found at the end of this answer - although it seems from the record of IR letters and other documents that it is required to so reside in order to file the LLC as a disregarded entity.

Alternatively, a couple may choose to be treated as a true partnership and file a Form 1065 if they make an election to be taxed instead as a partnership. This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage. By making the election, you will be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.

http://www.irs.gov/pub/irs-pdf/f8832.pdf

-----------------------------------------------------------------------------------------------

 Rental real estate business. If you and your spouse make the election for your rental real estate business, you must each report your share of income and deductions on Schedule E. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive loss limitation rules. Electing qualified joint venture status does not alter the application of the self-employment tax or the passive loss limitation rules.

------------------------------------------------------------------------------------------

COMPLEXITY AS TO RESIDENCY ISSUES:

The issue of not living in Community Property states and LLCs owned jointly by, and only by married spouses was simplified in theory in 2007 by Congress - yet as of this time (now 2019), the IRS only provides for the opportunity of electing LLC to be considered a disregarded entity to residents of Community Property states.

NOTE THAT THIS DISCUSSION IN 2007 HAS NOT BEEN FOLLOWED BY THE IRS.  Starting in 2007, any married couple [in theory, whether or not living in a community property state, please see citations below] and who own, jointly and participate jointly an LLC may still consider the LLC to be a "disregarded entity" a  so-called 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.

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.

 Sec. 8215 of the "Small Business and Work Opportunity Act of 2007" (4/25/07)  [Please see page 10 et ff. section I.A.5 of the following document: www.jct.gov/publications.html?func=startdown&id=1435 ]  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 [see notes at the end of this posting], this new law was 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.

--------------------------------------------------------------------------------

==============================================

 Discrepancies and Controversy relative to whether or not Community Property State residency is required

 IRS document  "Election for Husband and Wife Unincorporated Businesses"  http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincor...  clearly states the following:

"An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes." "IRS citation: Page Last Reviewed or Updated: 27-Nov-2013" 

Similarly a reading of the Act itself  [Please see page 10 et ff. section I.A.5 of the following document: www.jct.gov/publications.html?func=startdown&id=1435 ] also states the same.

Nevertheless many accountants have been cautious in applying the election of a disregarded entity to a LLC in a non-community property state.  Moreover there are conflicting IRS documents that do not seem to have caught up with the Act of 2007.  As an example, this IRS document contradicts the Act  by stating that LLCs in non-community property states are "state law entities":

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Compa...

 The DISCREPANCY: The issue is whether or not the LLC in a non-community property state is a "qualified business venture" or as the IRS states, a "state law entity."  As an example, New York state which is not a community property state has the following instruction relative to NY taxes:

"NYS LLC Franchise Tax Form IT-204-LL say: Beginning after 2006, the $100 filing fee payable by a single-member LLC (SMLLC) that is a disregarded entity for federal income tax purposes has expired. Therefore, SMLLCs that are disregarded entities no longer have to file Form IT-204-LL. In addition, the partnership filing fee for an LLC with more than one member that is a disregarded entity for federal income tax purposes(for example, an LLC owned solely by a husband and wife) has expired." 

9 Replies
Level 1

How should a husband-wife LLC file?

We live in Colorado.
Level 1

How should a husband-wife LLC file?

"An LLC owned solely by husband and wife [please see  discussion below relative to living in a community property state] can be  treated as a single member limited liability company"--  Sorry i do not think this is accurate. They live in Colorado, which i believe is not a community property State.

Does it qualify to elect as a joint venture? No

The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP).

<a rel="nofollow" target="_blank" href="https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-an...>


============================================================
@johndoecpa   Please note the dates of postings of both the original question and the answers.  The Answers clearly list the states where Community Property laws apply.  Subsequent to the posting of the answers, the OP then supplied a comment indicating that they lived in CO - which was obviously not listed in the answer so reference to Community Property was no longer an issue once they supplied that information.

Once the OP's comment had been posted, the information in the earlier answer was the information they needed::
Copied from answer: "Note: If an LLC is owned by husband
 and wife in a non-community property state, the LLC should file as a
 partnership. LLCs owned by a husband and wife are not eligible to be “qualified
 joint ventures” (which can elect not be treated as partnerships) because they
 are state law entities. For more information see Election for Husband and Wife Unincorporated
 Businesses.[2013: <a rel="nofollow" target="_blank" href="http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincor...>
Level 14

How should a husband-wife LLC file?

UPDATED JANUARY, 2019 for Tax Year 2018

LLC owned by married couples with only the married couple as partners.

SUMMARY and then COMPLEX ANSWER follow

SUMMARY:

  1. If a married couple are the two (and only two) owners of a LLC, but if they do not live in a Community Property State =AZ, CA, ID, LA, NV, NM, TX, WA, & WI - then they must file Form 1065 Partnership return first in order to produce the Schedules K-1 for each of the two partners.  

  2. If a married couple are the two (and only two) owners of a LLC, and they live in a Community Property State =AZ, CA, ID, LA, NV, NM, TX, WA, & WI -  and both participate materially in the business, then the following explantion provides the reason why the couple can avoid filing Form 1065 and instead file with their Form 1040 (joint presumably) and for each spouse produce a Schedule C and Schedule SE, simplifing the filing of taxes process.  See below for how to account each spouses Schedule C and Schedule SE.

    See shorter answers below if you undertstand the why you can or cannot file Schedule C and SE.

======================================================================================

Pardon the long-winded answer but it is a complex matter.

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

 I'll start with the IRS instructions that do allow you to elect to treat your SMLLC as a disregarded entity, and then follow with a much more detailed explanation.   Whether you may or may not take the election discussed is a matter of controversy in non-community property states.  Please see the discussion at the end.

 Husband-Wife - Qualified Joint Venture [for real estate ventures- see below]

http://www.irs.gov/instructions/i1040sc/ch01.html

NOTE WELL (N.B.): ====BUSINESS product is not needed!

Home & Business produces Schedule C - preferably the DESKTOP

Can a husband and wife, both residing in a Community Property state, run a business as a sole proprietor or do they need to be a partnership?

  • If you and your spouse each materially participate (see Material participation, later, in the instructions for line G) as the only members of a jointly owned and operated business and you file a joint return for the tax year, you can accept the IRS' default designation of your LLC (owned by a married couple, only members, Community Property State residents) as a "disregarded entity."   This means, that given the particulars as stated, your partnership status (the dual member LLC) is disregarded.  The IRS designates your business as a Qualified Joint Venture.  You both are treated as Sole Proprietors.  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), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture. Of course, being in a community property state will obviously have an impact on distribution of the LLC membership interests in the event of a dissolution of the marriage.

  • Alternatively, if a married couple, each participating materially, and being the only two partners in an LLC, and living in a Community Property State, may choose to be treated as a partnership with responsibility to file a Form 1065 for the LLC and then file their Form 1040 inclusive of the Schedule K-1(1065) each receives.  This requires a prior election to be treated as a partnership for tax-filing purposes. Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.   So by March 15th of a year it is too late to so elect for the prior year.  However, you can file your Form 8832 to elect to not be a disregarded entity status going forward.  Attach a copy of your Form 8832 to your partnership tax return when you file it.

  • 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. 
 Please note that there are discrepancies between various IRS publications as to the matter of whether or not living in a Community Property State [e.g.,AZ, CA, ID, LA, NV, NM, TX, WA, & WI] is a requirement that would allow "disregarding" the LLC partnership and filing simply as two sole proprietors on two Schedule C  forms.  However, the appropriate path is to assume that the three points above apply.
-----------------------------------------------------------------------------------------------------------------------------------

How to account for dual Schedules C and SE 
You must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C, C-EZ, or F. On each line of your separate Schedule C, C-EZ, or F, you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE to pay self-employment tax, as applicable.

 For more information on qualified joint ventures, go to IRS.gov. Enter “qualified joint venture” in the search box and select “Election for Husband and Wife Unincorporated Businesses.”

----------------------------------------------------------------------------------------------------------------------------

Commentary on whether or not community property state residence is required may be found at the end of this answer - although it seems from the record of IR letters and other documents that it is required to so reside in order to file the LLC as a disregarded entity.

Alternatively, a couple may choose to be treated as a true partnership and file a Form 1065 if they make an election to be taxed instead as a partnership. This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage. By making the election, you will be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.

http://www.irs.gov/pub/irs-pdf/f8832.pdf

-----------------------------------------------------------------------------------------------

 Rental real estate business. If you and your spouse make the election for your rental real estate business, you must each report your share of income and deductions on Schedule E. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive loss limitation rules. Electing qualified joint venture status does not alter the application of the self-employment tax or the passive loss limitation rules.

------------------------------------------------------------------------------------------

COMPLEXITY AS TO RESIDENCY ISSUES:

The issue of not living in Community Property states and LLCs owned jointly by, and only by married spouses was simplified in theory in 2007 by Congress - yet as of this time (now 2019), the IRS only provides for the opportunity of electing LLC to be considered a disregarded entity to residents of Community Property states.

NOTE THAT THIS DISCUSSION IN 2007 HAS NOT BEEN FOLLOWED BY THE IRS.  Starting in 2007, any married couple [in theory, whether or not living in a community property state, please see citations below] and who own, jointly and participate jointly an LLC may still consider the LLC to be a "disregarded entity" a  so-called 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.

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.

 Sec. 8215 of the "Small Business and Work Opportunity Act of 2007" (4/25/07)  [Please see page 10 et ff. section I.A.5 of the following document: www.jct.gov/publications.html?func=startdown&id=1435 ]  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 [see notes at the end of this posting], this new law was 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.

--------------------------------------------------------------------------------

==============================================

 Discrepancies and Controversy relative to whether or not Community Property State residency is required

 IRS document  "Election for Husband and Wife Unincorporated Businesses"  http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincor...  clearly states the following:

"An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes." "IRS citation: Page Last Reviewed or Updated: 27-Nov-2013" 

Similarly a reading of the Act itself  [Please see page 10 et ff. section I.A.5 of the following document: www.jct.gov/publications.html?func=startdown&id=1435 ] also states the same.

Nevertheless many accountants have been cautious in applying the election of a disregarded entity to a LLC in a non-community property state.  Moreover there are conflicting IRS documents that do not seem to have caught up with the Act of 2007.  As an example, this IRS document contradicts the Act  by stating that LLCs in non-community property states are "state law entities":

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Compa...

 The DISCREPANCY: The issue is whether or not the LLC in a non-community property state is a "qualified business venture" or as the IRS states, a "state law entity."  As an example, New York state which is not a community property state has the following instruction relative to NY taxes:

"NYS LLC Franchise Tax Form IT-204-LL say: Beginning after 2006, the $100 filing fee payable by a single-member LLC (SMLLC) that is a disregarded entity for federal income tax purposes has expired. Therefore, SMLLCs that are disregarded entities no longer have to file Form IT-204-LL. In addition, the partnership filing fee for an LLC with more than one member that is a disregarded entity for federal income tax purposes(for example, an LLC owned solely by a husband and wife) has expired." 

Level 14

How should a husband-wife LLC file?

It certainly does!   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.

I'll post next the technically accurate response to the question of how to file an LLC when the partners are married but do not live in a community property state, but I would first want to say that I can understand your CPA taking the "short cut" that was done of assuming the LLC would be considered as an SMLLC and disregarded.   However, as you may read the full post below, that is not correct.

So the question goes to whether you want to continue that practice of filing, with the possibility, low I grant you, of an IRS inquiry at some future time, or whether you want to alter the process to that accepted by the IRS.

In reading the next post, please do note that even the IRS is inconsistent as to whether or not you, living in a state that is not community property, can treat your LLC as a disregarded SMLLC

Level 1

How should a husband-wife LLC file?

What if the husband and wife reside in a community property state (CA) but they formed  and operated the LLC in a non community property state(FL)? What laws prevails if they want to switch from filing a 1065 Partnership LLC to a 1040 single member LLC  in which the husband now owns 100% of the the property as opposed to previously when he owned 51%? The wife signed over ownership to the husband in mid year (2013) but the LLC document with FL was not revised until early 2014. The 2012 tax return was filed as a 1065 partnership LLC and was not marked final. Part of the problem is they didn't file an Extension for 2012 and I was able to get them a one time waiver of penalties but I can't afford an error here because although they filed a timely extension for 2013, if they don't file the 1065 for 2013 I suppose the IRS could penalize them for not doing so if the husband files a Schedule 1040 E instead? The LLC is rental real estate property.
Level 14

How should a husband-wife LLC file?

The issue is an unfortunately complex one and very dependent on your state of residency.

From what you say, may I assume that you live in one of these states: AZ, CA, ID, LA, NV, NM, TX, WA, & WI - meaning you live in a community property state. 

If that is correct, then your CPA is correct as to the IRS disregarding the fact  of the LLC - that is they consider it to be a Single Member LLC [SMLLC] in community property states when the two partners are a married couple.

If this is your situation, then each of you, in your one joint Form 1040 with status MFJ, file a Schedule C and each file  Schedule SE. He erred in submitting a single Schedule C and should have allocated the income and expense between the two.  He essentially took a short-cut.  I suspect that ultimately it would be acceptable to the IRS even though it is not compliant.  The IRS would be most interested in the fact of the two SE's which is necessary.

I've posted the supporting information below for someone in your case - assuming you do indeed live in a community property state.

SIMPLE ANSWER FOR THOSE LIVING IN A COMMUNITY PROPERTY STATE: 

AZ, CA, ID, LA, NV, NM, TX, WA, & WI

Joint Ownership of LLC by Spouse in Community Property States - 

Rev. Proc. 2002-69 [http://www.irs.gov/pub/irs-drop/rp-02-69.pdf] addressed the issue of classification for an entity that is solely owned by husband and wife as community property under laws of a state, a foreign country or possession of the United States.

If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:

  • Disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.
  • Partnership for federal tax purposes, the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes.

A change in the reporting position will be treated for federal tax purposes as a conversion of the entity.

A business entity is a qualified entity if

  1. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
  2. No person other than one or both spouses would be considered an owner for federal tax purposes; and
  3. The business entity is not treated as a corporation under IRC §310.7701-2.

Note: If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be “qualified joint ventures” (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses.[2013: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincor...]

Level 1

How should a husband-wife LLC file?

I forgot to state that we live in Colorado.  Does that change anything?
Level 14

How should a husband-wife LLC file?

UPDATED JANUARY, 2019 for Tax Year 2018

LLC owned by married couples with only the married couple as partners.

SUMMARY and then COMPLEX ANSWER follow

SUMMARY:

  1. If a married couple are the two (and only two) owners of a LLC, but if they do not live in a Community Property State =AZ, CA, ID, LA, NV, NM, TX, WA, & WI - then they must file Form 1065 Partnership return first in order to produce the Schedules K-1 for each of the two partners.  

  2. If a married couple are the two (and only two) owners of a LLC, and they live in a Community Property State =AZ, CA, ID, LA, NV, NM, TX, WA, & WI -  and both participate materially in the business, then the following explantion provides the reason why the couple can avoid filing Form 1065 and instead file with their Form 1040 (joint presumably) and for each spouse produce a Schedule C and Schedule SE, simplifing the filing of taxes process.  See below for how to account each spouses Schedule C and Schedule SE.

    See shorter answers below if you undertstand the why you can or cannot file Schedule C and SE.

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Pardon the long-winded answer but it is a complex matter.

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

 I'll start with the IRS instructions that do allow you to elect to treat your SMLLC as a disregarded entity, and then follow with a much more detailed explanation.   Whether you may or may not take the election discussed is a matter of controversy in non-community property states.  Please see the discussion at the end.

 Husband-Wife - Qualified Joint Venture [for real estate ventures- see below]

http://www.irs.gov/instructions/i1040sc/ch01.html

NOTE WELL (N.B.): ====BUSINESS product is not needed!

Home & Business produces Schedule C - preferably the DESKTOP

Can a husband and wife, both residing in a Community Property state, run a business as a sole proprietor or do they need to be a partnership?

  • If you and your spouse each materially participate (see Material participation, later, in the instructions for line G) as the only members of a jointly owned and operated business and you file a joint return for the tax year, you can accept the IRS' default designation of your LLC (owned by a married couple, only members, Community Property State residents) as a "disregarded entity."   This means, that given the particulars as stated, your partnership status (the dual member LLC) is disregarded.  The IRS designates your business as a Qualified Joint Venture.  You both are treated as Sole Proprietors.  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), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture. Of course, being in a community property state will obviously have an impact on distribution of the LLC membership interests in the event of a dissolution of the marriage.

  • Alternatively, if a married couple, each participating materially, and being the only two partners in an LLC, and living in a Community Property State, may choose to be treated as a partnership with responsibility to file a Form 1065 for the LLC and then file their Form 1040 inclusive of the Schedule K-1(1065) each receives.  This requires a prior election to be treated as a partnership for tax-filing purposes. Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.   So by March 15th of a year it is too late to so elect for the prior year.  However, you can file your Form 8832 to elect to not be a disregarded entity status going forward.  Attach a copy of your Form 8832 to your partnership tax return when you file it.

  • 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. 
 Please note that there are discrepancies between various IRS publications as to the matter of whether or not living in a Community Property State [e.g.,AZ, CA, ID, LA, NV, NM, TX, WA, & WI] is a requirement that would allow "disregarding" the LLC partnership and filing simply as two sole proprietors on two Schedule C  forms.  However, the appropriate path is to assume that the three points above apply.
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How to account for dual Schedules C and SE 
You must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C, C-EZ, or F. On each line of your separate Schedule C, C-EZ, or F, you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE to pay self-employment tax, as applicable.

 For more information on qualified joint ventures, go to IRS.gov. Enter “qualified joint venture” in the search box and select “Election for Husband and Wife Unincorporated Businesses.”

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Commentary on whether or not community property state residence is required may be found at the end of this answer - although it seems from the record of IR letters and other documents that it is required to so reside in order to file the LLC as a disregarded entity.

Alternatively, a couple may choose to be treated as a true partnership and file a Form 1065 if they make an election to be taxed instead as a partnership. This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage. By making the election, you will be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.

http://www.irs.gov/pub/irs-pdf/f8832.pdf

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 Rental real estate business. If you and your spouse make the election for your rental real estate business, you must each report your share of income and deductions on Schedule E. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive loss limitation rules. Electing qualified joint venture status does not alter the application of the self-employment tax or the passive loss limitation rules.

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COMPLEXITY AS TO RESIDENCY ISSUES:

The issue of not living in Community Property states and LLCs owned jointly by, and only by married spouses was simplified in theory in 2007 by Congress - yet as of this time (now 2019), the IRS only provides for the opportunity of electing LLC to be considered a disregarded entity to residents of Community Property states.

NOTE THAT THIS DISCUSSION IN 2007 HAS NOT BEEN FOLLOWED BY THE IRS.  Starting in 2007, any married couple [in theory, whether or not living in a community property state, please see citations below] and who own, jointly and participate jointly an LLC may still consider the LLC to be a "disregarded entity" a  so-called 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.

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.

 Sec. 8215 of the "Small Business and Work Opportunity Act of 2007" (4/25/07)  [Please see page 10 et ff. section I.A.5 of the following document: www.jct.gov/publications.html?func=startdown&id=1435 ]  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 [see notes at the end of this posting], this new law was 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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 Discrepancies and Controversy relative to whether or not Community Property State residency is required

 IRS document  "Election for Husband and Wife Unincorporated Businesses"  http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincor...  clearly states the following:

"An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes." "IRS citation: Page Last Reviewed or Updated: 27-Nov-2013" 

Similarly a reading of the Act itself  [Please see page 10 et ff. section I.A.5 of the following document: www.jct.gov/publications.html?func=startdown&id=1435 ] also states the same.

Nevertheless many accountants have been cautious in applying the election of a disregarded entity to a LLC in a non-community property state.  Moreover there are conflicting IRS documents that do not seem to have caught up with the Act of 2007.  As an example, this IRS document contradicts the Act  by stating that LLCs in non-community property states are "state law entities":

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Compa...

 The DISCREPANCY: The issue is whether or not the LLC in a non-community property state is a "qualified business venture" or as the IRS states, a "state law entity."  As an example, New York state which is not a community property state has the following instruction relative to NY taxes:

"NYS LLC Franchise Tax Form IT-204-LL say: Beginning after 2006, the $100 filing fee payable by a single-member LLC (SMLLC) that is a disregarded entity for federal income tax purposes has expired. Therefore, SMLLCs that are disregarded entities no longer have to file Form IT-204-LL. In addition, the partnership filing fee for an LLC with more than one member that is a disregarded entity for federal income tax purposes(for example, an LLC owned solely by a husband and wife) has expired." 

Highlighted
Level 14

How should a husband-wife LLC file?

The issue is an unfortunately complex one and very dependent on your state of residency.

From what you say, may I assume that you live in one of these states: AZ, CA, ID, LA, NV, NM, TX, WA, & WI - meaning you live in a community property state. 

If that is correct, then your CPA is correct as to the IRS disregarding the fact  of the LLC - that is they consider it to be a Single Member LLC [SMLLC] in community property states when the two partners are a married couple.

If this is your situation, then each of you, in your one joint Form 1040 with status MFJ, file a Schedule C and each file  Schedule SE. He erred in submitting a single Schedule C and should have allocated the income and expense between the two.  He essentially took a short-cut.  I suspect that ultimately it would be acceptable to the IRS even though it is not compliant.  The IRS would be most interested in the fact of the two SE's which is necessary.

I've posted the supporting information below for someone in your case - assuming you do indeed live in a community property state.

SIMPLE ANSWER FOR THOSE LIVING IN A COMMUNITY PROPERTY STATE: 

AZ, CA, ID, LA, NV, NM, TX, WA, & WI

Joint Ownership of LLC by Spouse in Community Property States - 

Rev. Proc. 2002-69 [http://www.irs.gov/pub/irs-drop/rp-02-69.pdf] addressed the issue of classification for an entity that is solely owned by husband and wife as community property under laws of a state, a foreign country or possession of the United States.

If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:

  • Disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.
  • Partnership for federal tax purposes, the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes.

A change in the reporting position will be treated for federal tax purposes as a conversion of the entity.

A business entity is a qualified entity if

  1. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
  2. No person other than one or both spouses would be considered an owner for federal tax purposes; and
  3. The business entity is not treated as a corporation under IRC §310.7701-2.

Note: If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be “qualified joint ventures” (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses.[2013: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincor...]