Discussion:Husband-Wife, LLC in Community Property State

FACTS:

1. Husband and wife each own 50% per LLC docs
2. LA (state of formation) is community property state
3. In terms of the couple, wife provides about 70% of the services to the LLC. Husband has another job, but helps out part-time
4. Business is not a "service partnership." They provide after-school care/educational services.

I'm having trouble wrapping my brain on a way I can allocate half of the ordinary income to the husband w/o allocating SE income. I've read numerous posts in these forums where people have made the case that his interest might be equivalent to that of a "limited partner." Not sure how this makes sense given that he has the authority to bind the LLC in a contract, hence "general partner" status. The economics of this arrangement are similar to that of a sole proprietorship where the husband provides services and gets a W-2.

Given the fact that we're in a community property state, couldn't we say that absent filing 1065 (i.e. Wife filing Sch C) that we'd be picking up all income as SE income.

I want to be conservative, but don't want to miss out on a LEGITIMATE way to save on SE tax given we have the option to file a 1065.

Thanks

1. At the bottom of each of those discussions, there's a line that says "Categories:" - some discussions only have the "tax questions" category(ies), but these two have an additional one, Bifurcation. Clicking on that category gets you all of the discussions that have been manually categorized as being part of that topic.

2. On the left side of the screen, in the "toolbox," you can click "what links here." That'll usually tell you that nothing links to the discussion you were looking at, but sometimes, if it's a really good discussion, it will have been linked in other related discussions. This is the case for both of the discussions Kevin suggested. Looking at "what links here" leads you to places you can get even more info on the topic.

Now, these little tips won't always work - on some topics, there are very few discussions "categorized," and many discussions never get linked to by anybody. But sometimes (like this topic), they're a gold mine! (I'm providing these extra tricks because you did already search, it sounds like; these are ways to turbocharge a search.)

Tax Atty in LA put together and operating agreement where by the Wife a school teacher, is not included for SE Tax. Q. Husband and Wife are in LLC. The own the land and building were the business is operated out of. This ownership is in community LA. The property is owned personally. Can Husband and Wife lease (Rent Income) building there own LLC (1065)?

Your question is whether an partner can lease property to his own partnership, thereby reducing his self-employment tax from the partnership. I don't see a problem with that.

Thanks for the answer, R2

1) Disregarded entity (i.e. Sch C) with only one spouse reporting the income/paying SE tax or 2) File a 1065 with both partners picking up their distributive share of income/SE income.

In 2) above.. Any wiggle room to NOT allocate SE income to a non-active partner?? In my case, the husband isn't quite as active but can bind the LLC. I'm think both should pick up SE income given those facts.

Don't think the QJV rules apply since those relate to a married couple in a non-CP state. In that case, the couple could elect to be a QJV by simply filing two Sch Cs with each spouse picking up their share of the income on their individual Sch C.

Check with an LA attorney to confirm whether a managing member needs to be elected under LA state law. It could be that this LLC has no managing members, in which case you would have an argument that the husband is a limited partner under the proposed regs.

The QJV election can be made in CP states.