My wife and I are both self-employed as freelancers and bill for our services (unrelated, separate activities) through our LLC. Since my wife and I live in a community property state (WI), this LLC is community property and -- though both my wife and I are members -- thus considered a single-member LLC and disregarded entity.
Since there is only one "business" (albeit with different activities), there is only 1 Schedule C that aggregates both my wife's and my own SE income.
However, my activity accounts for 30% of the profits, my wife's for 70%. I would thus like to file 2 Schedule SE, one for my share of SE taxes and one for my wife's share of SE taxes to be a bit more precise here. (but still have only 1, combined Schedule C).
Turbotax Home & Business does not seem to allow for that scenario (i.e. 1 Schedule C, 2 Schedule SE based on share of income). What Turbotax suggests instead is to de-facto create 2 business, one for each spouse and assign SE income accordingly. This means there are 2 Schedule Cs and 2 Schedule SEs, each with a 30/70 split in our case.
Though this is a bit clunky, of course, this would usually not matter much, especially in a community property state, but in our case it does: our individual SE income is lower than our health insurance premia, but our combined SE income is higher. So, if there is 1 Schedule C, we can deduct 100% of our health insurance premia, but if we split our income into 2 Schedule Cs, we can't deduct the premia in their entirety, since neither income is high enough.
My questions:
1) Is there a workaround within Turbotax to address this issue (i.e. to have 1 Schedule C and 2 Schedule SE instead of 2 Schedule C and 2 Schedule SE, as TT suggests)
2) If not, what alternatives do we have (e.g. assign one spouse as the LLC owner in Year 1 and the other in Year 2 - which would lead to 1 Schedule C and 1 Schedule SE in each year with one spouse paying and getting credit for all SE taxes in each year, but over time things would even out).
Thanks much!
My questions:
1) A workaround would violate IRS rules. In a community property state with a H&W owned LLC you can either file a 1065 or 2 schedule Cs. There's no other option.
2) Here's an alternative ===== You and your wife have ONE LLC for 2 "unrelated, separate activities" so one of you should use the existing LLC and the other should start a new LLC. Anyway, you can't go back and forth from year to year assigning 1 spouse 1 year and the other the next as that also violates IRS rules.
Thank you for your reply. Two questions/comments:
1) You mention IRS rules against going back and forth assigning an owner. Could you please point me to these rules?
2) What do you make of the following (found this after my first post):
"IRS Revenue Procedure 2002-69 stipulates that the IRS will respect your treatment of an unincorporated husband-wife business in a community property state [which is true in our case] as either
Put another way, in a community property state, you and your spouse can choose to treat your unincorporated husband-wife business as a sole proprietorship operated by one spouse for federal tax purposes. The IRS will never object, even when both you and your spouse are very active in the business."
This, it seems to me, would mean that you can treat a husband-wife LLC as a SMLLC/sole proprietorship in a community property state (i.e. file 1 Schedule C, 1 Schedule SE). In TT, that would mean to aggregate the SE profits from my and my wife's business activities in 1 Schedule C (which is assigned to either me or my wife as the "sole proprietor") which in TT then generates 1 Schedule SE (with all SE income assigned to either me or my wife for SE tax purposes).
The switching back-and-forth may not be possible (please provide source), but ultimately this (and the associated SE tax/social security effects) does not matter that much in a community property state anyway. Key for me is having 1 Schedule C with aggregated SE income to be able to deduct all healthcare premia rather than only part when incomes are split on 2 separate Schedule Cs.
Thank you!
Here's the IRS substantial economic substance doctrine:
https://www.irs.gov/pub/irs-drop/n-14-58.pdf
Here's the IRS QJV procedures and how the QJV involves filing two SCH Cs:
Thank you!
I found exactly what I was looking for (it was really hard to find): IRS Pub 541, bold/italics by me:
Community property.
Spouses who own a qualified entity (defined below) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. A change in reporting position will be treated for federal tax purposes as a conversion of the entity.
A qualified entity is a business entity that meets all the following requirements.
For more information about community property, see Pub. 555, Community Property. Pub. 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
To summarize:
I think both alternatives are possible in a community property state: you can 1) split the Schedule Cs and the Schedule SEs between husband wife or you can ( 2 Cs, 2 SEs) 2) assign the husband-wife LLC to one spouse as the sole owner -> 1 Schedule C in the name of that owner and 1 Schedule SE in the name of that owner.
2) is beneficial for low SE incomes, since it allows you to aggregate the income from both spouses which allows you to take higher deductions against it (like health insurance).
But once you assign to one owner, I guess it has to stay that way.