Discussion:HUSBAND/WIFE LLC MEMBERS
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22 January 2008 | |
| I have a new client who has 2 LLC's, both of which have the husband and wife as members. These LLC's were started in 2007. One is for rental properties and the other is for a restaurant. As a result of the "Small Business and Work Opportunity Act of 2007" can I basically treat these entities as disregarded entities and file a schedule E and C respectively? As I understand it, each spouse would file a schedule E and C with his or her respective share of the joint venture's income and expenses. Is this correct? Can anyone see a benefit to making an S election? The client would like to keep things as simple as possible. Thanks for your help! | |
| January 22, 2008 | |
| Glad you asked this. I have a couple H/W LLC's as well, businesses both of them. And began to wonder if I should trash the 1065. And then it hit me, SE tax. By shifting to Sch. C, you capitulate to having all the profits show up and hit the SE form. Both of mine are profitable by a bunch, and we tax a reasonable amount for SE. So while that looked pretty useful for Sch. E situations, not for Sch. C's. That's my take so far. | |
| 22 January 2008 | |
| JR, I don't get the SE difference - unless you were bifurcating. | |
| January 22, 2008 | |
| I'm not, tho' should be if they'd get to an attorney. Remember, the LLC SE tax landscape is open right now, so anything that the client is willing to risk is arguable since there are no rules. In one case, this is the first year of profit after 10 years, and it's a big one. He'll take a reasonable 'salary' and leave the rest. The other one is a mostly retired guy who has several employees who do the work and he's been willing to consider himself a passive owner. Both know the risks. Of course, now with the new preparer rules, am I confident that I can prevail? Well, since there are NO rules, it's pretty hard to figure out how to lose. | |
| 22 January 2008 | |
| I must have been asleep since the big bifurcation discussion last year - what happened to open up the SE landscape? I was under the assumption that it was still an all/nothing/bifurcate the membership interest decision. | |
| 22 January 2008 | |
| (I'm certain someone will tell me to search the yellow box.) | |
| January 22, 2008 | |
| Nothing ever has changed since inception of LLC's. No rules. Proposed regs which have the power of toilet paper. The bifurcation conversation was merely a pretty smart way to ensure a split of active and limited interests, perhaps permanently no matter what regs ultimately are passed. But the options are all, nothing, something in between (reasonable), bifurcate, check the stupid box....Cayman Islands. | |
Death&Taxes (talk|edits) said: | 22 January 2008 |
| Discussion: LLC, SE Tax, and Bifurcation of Income sil vous plais? | |
| 22 January 2008 | |
| I think more the problem with the disregarded entities is the amount of work involved (and required documentation) under the rules as opposed to simply allocating by arbitrary percentage with a 1065. | |
Death&Taxes (talk|edits) said: | 22 January 2008 |
| One point: LLC's in PA file the PA RCT-101, but pay no corporate income tax tax if they elect partnership status, but the nasty of this is that unless guaranteed salaries are taken to reduce book income, capital stock tax raises its ugly head. Now if they take Guaranteed Salaries, it kind of defeats the SE savings unless they want to claim they are for the use of capital. Basically PA takes average book income, divides by .095, divides by 2 and subtracts 125K and if there is a remainder, the CST is computed. If you have a profit of 200K or so, this can get vicious, though the CST is deductible unlike the SE tax. | |
| 22 January 2008 | |
| Death&Taxes...My client is in PA. Yes, the PA RCT-101 would have to be filed regardless of entity choice. However, isn't capital stock tax scheduled to go away in a few years?
I come back to my original question...Is the best choice to split everything on schedules C & E and not file a 1065? Am I correctly allowed to do this with the new legislation? Any downsides to not filing a 1065? | |
Death&Taxes (talk|edits) said: | 22 January 2008 |
| MAS: read Professor Maule http://mauledagain.blogspot.com/ But you are right, the long term trend is for the CST to go away; remember when it was $300?
There was a columnist in the Philadelphia Inquirer ten plus years ago who would end any piece about Harrisburg with "Pennsylvania: Land of Giants" | |
| 23 January 2008 | |
| The election is for a Sch C ONLY; you cannot elect joint venture status to report LLC income that has been reported as a partnership as an RE biz on the E. Taking the election would put what is rental income not subject to SE on the 1065 on the C and make it subject to SE. See the instructions to Form 1065. | |
| January 23, 2008 | |
| That makes the whole thing fairly pointless then, doesn't it? Thanks, Joan. | |
| 23 January 2008 | |
| (I would double-check because I thought that we learned late last year that it DID apply to Sch E as well as Sch C). | |
| 23 January 2008 | |
| The instructions to the 1065 speak only of making an election to the C, C-EZ, or F. Here's what Congress foisted upon us. It only talks of a 'trade or business' that will now be treated as a 'sole proprietor'. But it does say that earnings from a 'joint venture' are subject to SE.
SEC. 8215. FAMILY BUSINESS TAX SIMPLIFICATION. (a) IN GENERAL- Section 761 (defining terms for purposes of partnerships) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: `(f) QUALIFIED JOINT VENTURE- `(1) IN GENERAL- In the case of a qualified joint venture conducted by a husband and wife who file a joint return for the taxable year, for purposes of this title -- `(A) such joint venture shall not be treated as a partnership, `(B) all items of income, gain, loss, deduction, and credit shall be divided between the spouses in accordance with their respective interests in the venture, and `(C) each spouse shall take into account such spouse's respective share of such items as if they were attributable to a trade or business conducted by such spouse as a sole proprietor. `(2) QUALIFIED JOINT VENTURE- For purposes of paragraph (1), the term `qualified joint venture' means any joint venture involving the conduct of a trade or business if -- `(A) the only members of such joint venture are a husband and wife, `(B) both spouses materially participate (within the meaning of section 469(h) without regard to paragraph (5) thereof) in such trade or business, and `(C) both spouses elect the application of this subsection.'. (b) NET EARNINGS FROM SELF-EMPLOYMENT- (1) Subsection (a) of section 1402 (defining net earnings from self-employment) is amended by striking `, and' at the end of paragraph (15) and inserting a semicolon, by striking the period at the end of paragraph (16) and inserting `; and', and by inserting after paragraph (16) the following new paragraph: `(17) notwithstanding the preceding provisions of this subsection, each spouse's share of income or loss from a qualified joint venture shall be taken into account as provided in section 761(f) in determining net earnings from self-employment of such spouse.'. (2) Subsection (a) of section 211 of the Social Security Act (defining net earnings from self-employment) is amended by striking `and' at the end of paragraph (14), by striking the period at the end of paragraph (15) and inserting `; and', and by inserting after paragraph (15) the following new paragraph: `(16) Notwithstanding the preceding provisions of this subsection, each spouse's share of income or loss from a qualified joint venture shall be taken into account as provided in section 761(f) of the Internal Revenue Code of 1986 in determining net earnings from self-employment of such spouse.'. (c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2006. | |
| 23 January 2008 | |
| Another thought and observation (after an animated discussion with my coworker about the ramifications Congress never thinks of when they 'simplify'). First of all, for the rental partnership to qualify for JV status, both partners need material participation, which could be difficult for a rental. However, if you can and did make the election, does this then become a loophole to bypass the passive activity rules for rental losses? The IRS TaxTalk seemed to think it was a possibility. Or would the passive rules trump this new law? | |
| 20 February 2008 | |
| IRS postion is husband and wife LLC does not qualify for the election out of Form 1065.
See http://www.irs.gov/businesses/small/article/0,,id=177376,00.html | |
| 20 February 2008 | |
| the H/W owned real estate whether in an LLC or owned as TIC or JT can continue to file on schedule E rather than file a 1065 - the more poeple talk about this the more confusing it seems | |
| 7 April 2008 | |
| Does anyone have the exact IRS Code reference or Rev Proc that h/w owned real estate through an LLC can be reported directly on Schedule E and no 1065 needed? That has always been my understanding, and it is being challenged. I have looked for the exact reference and thought there was a REv Proc on this specifically. Thanks. | |
| 7 April 2008 | |
| I was under the impression that starting for tax year ended 12/31/07 a H & W partnership can no longer file a 1065. There must be 2 sched Cs, one for H and one for W. | |
| 7 April 2008 | |
| Barb CPA, which question were you adding information to or answering? The question on the table appears to be about rental real estate. | |
