Sch E pg 2

[Bill Tubbs]

Couple are joint owners of an LLC -- she owns 90%, he owns 10%. LLC filed a 1065 and issued K-1's to both individuals. On the K-1's Line 14A Self-Employment Income was filled in to be 90%/10% of the Ordinary Income. There is also Section 179 on both K-1's. She actively works the business; he doesn't do anything.

First question -- should 1065 K-1 Line 14A been filled in for him?

Her figures would go under Nonpassive Income, Section 179 in column (i) and the ordinary income in (j). How do his numbers get reported on 1040 Sch E pg 2? Is he Passive or Nonpassive? If passive, what happens to the Section 179? (He does have W-2 wages external to the partnership -- does that help deduct the Section 179?) Can I net the ordinary income and S179 together and report on column (g)?

Thanks,
Bill

[DaveinTexas]

Great question

Couple are joint owners of an LLC -- she owns 90%, he owns 10%. LLC filed a 1065 and issued K-1's to both individuals. On the K-1's Line 14A Self-Employment Income was filled in to be 90%/10% of the Ordinary Income. There is also Section 179 on both K-1's. She actively works the business; he doesn't do anything.

First question -- should 1065 K-1 Line 14A been filled in for him?

Her figures would go under Nonpassive Income, Section 179 in column (i) and the ordinary income in (j). How do his numbers get reported on 1040 Sch E pg 2? Is he Passive or Nonpassive? If passive, what happens to the Section 179? (He does have W-2 wages external to the partnership -- does that help deduct the Section 179?) Can I net the ordinary income and S179 together and report on column (g)?

Thanks,
Bill

I would take a look at the Operating Agreement. Does the husband have any Managerial rights, contract binding rights, is he personally liable for partnership debts, participate more than 500 hours in the activity?

I think it is possible for the husband to be treated as a limited partner (no line 14a income), plus use the material participation of his wife to pass through the income/loss as non-passive. This is possible in an S Corp too, for a non materially participating spouse (who doesn't perform a service for the s corp) to qualify their activity as non-passive if their spouse materially participates.

Be sure to inform the clients to document this somehow in the Operating Agreement and also document the fact that if the non participating spouse were to perform services, compensation needs to be paid (guaranteed payment) to solidify tHe arrangement.

Making the K-1 for the husband non-passive should pass through the 179 expense to the E2.