1099-NEC issued to one spouse when H+W own the LLC in a community property state. The business is a disregarded entity. See Rev. Proc. 2002-69. How do we report the split income to both spouses?

[JSR4321]

Here are our facts:

• Husband and wife own a Texas limited liability company (no other person owns the business)
• Husband and wife are domiciled in Texas
• Husband and wife file federal taxes jointly

In Rev. Proc. 2002-69, the IRS provided guidance on the classification for federal tax purposes of a qualified entity that is owned solely by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States

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 a 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 § 301.7701-2. 

According to the Rev. Proc., if a qualified entity, 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.

Here is a link to Rev. Proc. 2002-69: https://www.irs.gov/pub/irs-drop/rp-02-69.pdf

Under the Revenue Procedure, our business satisfies the requirements for a qualified entity. So H+W are treating it as such for federal tax purposes.

When we filled out the W-9, we thought we followed the directions properly, but now it seems to have created an odd situation for our taxes. The instructions for Part I of the W-9, where you enter the TIN, stated the following:

If you are a single-member LLC that is disregarded as an entity separate from its owner, enter the owner’s SSN (or EIN, if the owner has one). Do not enter the disregarded entity’s EIN. If the LLC is classified as a corporation or partnership, enter the entity’s EIN. 

It doesn’t seem like the W-9 takes into account the strange entity that we are, where there are truly two owners. The W-9 doesn’t have a space for two SSN. Based on our research, we thought the single-member LLC that is disregarded das an entity separate from its owner was the closest thing to what we are. Basically, the law looks at H+W as 1.

We are doing our taxes (luckily TX residents have until June 15 to file this year), and we hit a road bump because the 1099-NEC from the NLM has all of the income going to husband. We realize now that, duh, of course it would since that’s how we filled out the W-9. But we need to report 1/2 of the income to wife so we can properly report her self-employment taxes.

QUESTIONS: 

• Do we need to amended the 1099-NEC?
• Can we report the income to each spouse without matching the issued 1099-NEC?
• How should we fill out W-9s going forward? 

The business does have an EIN. We needed one to open a bank account. However, the language from the W-9 instructions, it says “Do not enter the disregarded entity’s EIN.” 

One other thing, I want to clarify that we are not a qualified joint venture. That is a totally different animal that we don’t qualify for since we own and operate the business through an LLC. https://www.irs.gov/publications/p334

Thoughts?

Thank you!

[M-MTax]

You and your spouse split the income on the 1099-NEC according to your interests per Rev. Proc. 2002-69, which is the same as QJV rules only that Rev. Proc. makes the QJV rules applicable to spouses who are both the only members of the LLC in a community property state.

[JSR4321]

Thanks for the reply.

Will it not matter that the husband's Sch. C won't match the 1099 since the income will be split between two Sch. Cs? I always hear about IRS "pinging" people when 1099's don't match what the individual reports.

Also, any advice for how to fill out the W-9 in the future so that the income will go to the business and we can then split the income on our two Sch. Cs? 

[M-MTax]

You hear about that because the people it happens to report it all over the joint......it doesn't happen all that often. Even if it does a simple letter of explanation should take care of it immediately and for good.

I have no suggestion on the W-9 unless the issuer will allow you to enter the EIN of the LLC or complete 2 forms with the understanding that each will be receive 50%......I doubt many would allow either one.