Might be a Tax Issue

[S T]

What are the tax ramifications, California - Community Property State.

Taxpayer forms an LLC - single member naming himself as he was unemployed at the time, and sets up a New business (2005) In 2006 he becomes employed and is back on payroll at $125K per year plus benefits.

Spouse (wife) materially participates in LLC (2006) and totally manages and runs the LLC business but is not on payroll. (Nor the LLC Articles as member, but 100% is running and operating the business) Business does have a a net profit of under $20K

So for 2006 how do we report? If to husband then no FICA as he has reached his FICA limits and spouse does not benefit crediting her FICA or Mcare account.

In 2007 what if they amend the LLC to either 50/50 or 100% to spouse (wife). Is this a taxable transaction?





Sandy

[Bees Knees]

You need to clarify whether or not the LLC elected to be taxed as a corporation, which would make a difference.

If this is a single member LLC that did not elect to be taxed as a corporation, it is disregarded for federal tax purposes. It would be no different than a husband and wife Schedule C business where both do some work as joint owners. IRS says they want a partnership return filed, but there is no penalty for failure to do so. Plus you have the issue of community property state having the option to elect to be a Schedule C rather than 1065 return, and the new law that allows all husband and wife businesses to elect Schedule C treatment, even if they are not in a community property state.

Assuming you file a Schedule C rather than a 1065, I would file it based on material participation in the business. You want to credit the one who did the work with the SE tax. Under the new law, you can even split the SE tax based on whatever.

Which brings up an interesting point under the new law. Since you can elect to file a Schedule C for a husband and wife partnership, and then split SE tax based on material participation, you don’t have to make this split 50/50. It can be whatever is reasonable.

[alliedtaxes]

You need to clarify whether or not the LLC elected to be taxed as a corporation, which would make a difference.

If this is a single member LLC that did not elect to be taxed as a corporation, it is disregarded for federal tax purposes. It would be no different than a husband and wife Schedule C business where both do some work as joint owners. IRS says they want a partnership return filed, but there is no penalty for failure to do so. Plus you have the issue of community property state having the option to elect to be a Schedule C rather than 1065 return, and the new law that allows all husband and wife businesses to elect Schedule C treatment, even if they are not in a community property state.

Assuming you file a Schedule C rather than a 1065, I would file it based on material participation in the business. You want to credit the one who did the work with the SE tax. Under the new law, you can even split the SE tax based on whatever.

Which brings up an interesting point under the new law. Since you can elect to file a Schedule C for a husband and wife partnership, and then split SE tax based on material participation, you don’t have to make this split 50/50. It can be whatever is reasonable.

Great answer Bees Knees. I agree.

The modern business corporation is addition to its legal personality, the modern business has at least three other legal characteristics: (i) transferable shares (shareholders can change without affecting its status as a legal entity), (ii) perpetual succession capacity ( existence despite shareholders' death or withdrawal), (iii) and limited liability.

[S T]

LLC is disregarded

Calif is a community property state. This return is for 2006.

So based on prior post , even though the spouse is not named in the Articles of Organization as a member of the LLC, but she is the one that materially participates, I can complete the Schedule C marked as spouse and allocate the net earnings for her social security account, and then also would be eligible for child care credit, as both h/w are employed?

Sandy

[Bees Knees]

That is correct, for federal tax purposes.

I can't say for CA purposes, unless they follow federal rules. Of course, your LLC limited liability status could be in jepordy under state law if she is the one doing the work, operating the business, but does not have her name on the articles of organization as a member of the LLC.

[Davc]

And I believethat CA still wants the $800 tax from LLCs while they argue about it.