Disregarded Entity Status?

[Tackslawyer]

If a husband and wife own an asset as joint tenants by the entirety and transfer it into an LLC, may they elect to have the LLC treated as a disregarded entity? I know you can do this in a community property state, but wasn't sure how this works in a common law state like Florida.

[Bees Knees]

There is an update posted on this website at http://www.thetaxbook.com/updates_view.asp?ID=72 that covers the new tax law passed last May. The new rule for husband and wife businesses applies to your question. It says the following:

Husband and Wife Business

Current Law, TheTaxBook™ 2006 Edition, pages 5-7 and 20-2: If a husband and wife operate a jointly owned business and share in the profits and losses, they should file Form 1065 as a partnership, not Schedule C. An exception applies for a husband and wife that wholly own an unincorporated business as community property under the community property laws of a state. In community property situations, the husband and wife can treat the business either as a sole proprietorship, or as a partnership.

New Law. Beginning in 2007, a qualified joint venture whose only members are a husband and wife may elect not to be treated as a partnership for federal tax purposes. A qualified joint venture is one where:

• The only members of the joint venture are a husband and wife,
• Both spouses materially participate in the trade or business, and
• Both spouses elect to have the provision apply.

All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, each spouse would account for his or her respective share on the appropriate form (such as Schedule C). The new law is not intended to change the determination under present law of whether an entity is a partnership for Federal tax purposes (without regard to this election).

For purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes (i.e., in accordance with their respective interests in the venture). A corresponding change is made to the definition of net earnings from self-employment under the Social Security Act. The new law is not intended to prevent allocations or reallocations, to the extent permitted under present law, by courts or by the Social Security Administration of net earnings from self-employment for purposes of determining Social Security benefits of an individual.

[John of PA]

Both Spouses..........

I find in most case Both Spouses do not participate. I do have some that are tennants by the entirety, and I file a 1065 to be safe. After all, you have to do a Balance Sheet Anyway for the state (PA).

[Tackslawyer]

Thank you - after reading the updates link you provided, I'm still left wondering - may the husband and wife elect to have the LLC treated as a "disregarded entity", and then report their items of income on Schedule C?

[John of PA]

Yes

Yes they can, provided they are not violating the rules listed in BeesKnees post.

[Tackslawyer]

Yes they can, provided they are not violating the rules listed in BeesKnees post.

So that would be an LLC/joint venture treated as a disregarded entity.

[John of PA]

I suppose

I suppose one can word it that way, yes.