Husband/Wife Joint ventures each their own LLC's..

[AZ-Tax]

Its my understanding that if the LLC has both husband and wife as members, exps and income needs to be divided up between the 2 on 2 separate Sch C's but in this case, the husband is supposedly performing 100% of the activity but the spouse is doing his Sch C books yet not getting paid by the LLC. hmmmm.

Now, the spouse in 2011 may be forming her own LLC for accounting business. So if both Husband and wife are members of that LLC, am I looking at 4 Sch C's, 2 for each LLC?

[taxea]

you are posting so many questions, I have to wonder whether we are doing your EA exam prep for you?

[WhiteOleander]

OK. I think that since it is a multi member LLC, they are not allowed to file two Sch C's. That is only allowed when there is no LLC or Corp involved. And I think they can only file the two Sch C's in a community property state.
So, a multi member LLC defaults to a 1065 partnership unless they elect to be taxed as a corp or S-Corp.
So, looks like two 1065's.

[David1980]

The IRS position I believe is if it's operating as a state LLC you cannot make the election to be taxed as a qualified joint venture.

Definition of a qualified joint venture

A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a husband and wife who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company) (See below).

http://www.irs.gov/businesses/small/article/0,,id=177376,00.html

Which would mean filing a 1065.

[AZ-Tax]

TTB 5-7 botton paragraph confusing re Community Property States

Husband/Wife joint venture and only 2 members of an AZ - LLC for which AZ is a community property state. The CPA filed 1 Sch C for this LLC in 2010, the start year for the LLC.

[WhiteOleander]

Because they are an LLC, they cannot file two Sch C's. They have to file a 1065. Before they formed the LLC, they were two individuals running a business. Now, it is an entity running the business, not two individuals.

[DaveinTexas]

I think Rev Proc 2002-69

Because they are an LLC, they cannot file two Sch C's. They have to file a 1065. Before they formed the LLC, they were two individuals running a business. Now, it is an entity running the business, not two individuals.

would prevail here. The Rev Proc describes that an entity wholly owned by husband and wife in a community property state can treat the entity as a partnership or as a disregarded entity (Sch C).

Here's the wording that pertains to this issue: "4. Application
.01. 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."

Here's the site to view this Rev Proc: http://www.keytlaw.com/az/entities/revproc2002-69.pdf

This topic causes much confusion because in a non-community property state, the husband and wife would have no choice (in an LLC) but to be taxed as a Partnership. In a community property state they have 3 options really, 1. Partnership, 2. One Schedule C for one of the spouses or 3. Two Schedule Cs reporting each spouse's ownership share of the company's income/expenses.

To reduce the confusion, for one of my clients in this situation, it was important for the wife to own a majority share of the business (to gain access to government contracts, etc). So, we decided to report all income and expenses on a schedule C in her name/SSN and then she pays her husband a salary for the work that he performs in the business. This way we can take advantage of the HRA (section 105 Health Reimbursement Plan) and deduct their medical bills as a business deduction. Kind of a win/win.

Some argue that in the above client's situation, the husband would have no right to the ownership in the company in the event of a divorce but I've been told by multiple attorneys that it doesn't really matter in a community property state (each spouse is usually granted half of the community assets anyway, including half of the business).

[WhiteOleander]

Thank you for the correction. So, now my mind is questioning the mechanics of filing two Sch Cs. I guess it would be OK to list the same EIN number on each Sch C? And if wages were paid to employees, split the wages between the two of them? Would this confuse the matching of the 941s? Also, can they do an other than 50/50 split? 70/30 etc?

[David1980]

Thank you for the correction. So, now my mind is questioning the mechanics of filing two Sch Cs. I guess it would be OK to list the same EIN number on each Sch C? And if wages were paid to employees, split the wages between the two of them? Would this confuse the matching of the 941s? Also, can they do an other than 50/50 split? 70/30 etc?

Well, the Schedule C instructions say this about a single member LLC and the EIN listed on Schedule C.

Single member LLCs. If you are the sole owner of an LLC that is not treated as a separate entity for federal income tax purposes, you may have an EIN that was issued to the LLC (and in the LLC's legal name) if you are required to file employment tax returns and certain excise tax returns. However, you should enter on line D only the EIN issued to you and in your name as a sole proprietor. If you do not have such an EIN, leave line D blank. Do not enter on line D the EIN issued to the LLC.

Note the last sentence. I think the same would be true?