topic Husband and wife are only members in a California LLC, how to file schedule C in Business & farm

Husband and wife are only members in a California LLC, how to file schedule C

california0905 — Tue, 06 Oct 2020 06:50:40 GMT

Husband and wife are only members in a California LLC. California is a community state and the LLC is treated as a disregarded entity for tax.

If only one spouse materially participate in the business and the other didn't materially participate in a year, should one schedule C (under one spouse) be filed for that year?

If next year, both spouses materially participate in the business, should two schedule Cs be filed (husband and wife split all income and expenses)?

Between those two years, are there any additional forms that needs to be filed with irs to reflect the change?

Re: Husband and wife are only members in a California LLC, how to file schedule C

Anonymous_ — Tue, 06 Oct 2020 13:56:30 GMT

There is a question on Schedule C as to whether the individual filing the schedule materially participated. If not, losses would be limited.

The qualified entity rule, for some reason, does not mention material participation.

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

However, the qualified joint venture rules do require material participation in order to make the election.

See https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorporated-businesses

Re: Husband and wife are only members in a California LLC, how to file schedule C

california0905 — Tue, 06 Oct 2020 16:18:15 GMT

The business had some profit and no loss.

So even through one spouse materially participated in the disregarded entity, husband and wife should file separate schedule Cs. Is it correct (split business income and expenses)?

Re: Husband and wife are only members in a California LLC, how to file schedule C

Carl — Tue, 06 Oct 2020 16:27:40 GMT

In the community property states of Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin if you have a multi-member LLC where there are only two owners, those two owners are legally married to each other, and those two owners will be filing a joint 1040 tax return, they have the option of splitting all business income and expenses down the middle and each partner reporting their share of the business income/expenses on a separate SCH C for each tax filer on the joint return. That means your joint 1040 return will have two SCH C’s included with it – one for each owner.

Re: Husband and wife are only members in a California LLC, how to file schedule C

Anonymous_ — Tue, 06 Oct 2020 19:26:42 GMT

In his post, @Carl simply restated what we already know, @california0905.

The question is whether or not you would file two Schedules C or whether the enterprise would default to a partnership due to lack of material participation by one of the spouses.

With respect to qualified joint ventures (which are a parallel to qualified entities for community property states), the IRS states:

....the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements for filing the election. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture.

See https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorporated-businesses

Note that one of the requirements for a qualified joint venture is that both spouses materially participate in the trade or business. Absent that material participation, it would appear that the default would be a partnership (presumably filing on Form 1065 and issuing K-1s to each spouse).

However, since you have a gain, there would appear to be no significant different between filing two Schedules C (and indicating that your spouse does not materially participate) and filing a 1065 and issuing a K-1 to your spouse also indicating that your spouse does not materially participate when entering the information from the K-1.