USA K1 or Schedule C?

[Samir]

This is an interesting case and I'm wondering which is the right answer.

There is an LLC with two partners 50-50. The LLC is treated as a partnership for taxes.

Each partner's share of income/loss passes-through on their respective k1. However, both partners are also spouses that file jointly, so both k1s come to the same return.

Now, if there was only one member, the LLC would be disregarded and the information passes through on the individuals schedule c. Does this same rule apply to this situation since the partners are spouses that file on the same return (and hence the same TIN)?

 

[ColinCPA]

This is an interesting case and I'm wondering which is the right answer.

There is an LLC with two partners 50-50. The LLC is treated as a partnership for taxes.

Each partner's share of income/loss passes-through on their respective k1. However, both partners are also spouses that file jointly, so both k1s come to the same return.

Now, if there was only one member, the LLC would be disregarded and the information passes through on the individuals schedule c. Does this same rule apply to this situation since the partners are spouses that file on the same return (and hence the same TIN)?

An unincorporated business with only husband and wife as members or partners (or I guess husband and husband or wife and wife in some states now) can elect to be treated as a qualified joint venture, which would be a disregarded entity similar to a SMLLC. Both spouses must materially participate in ths business (within the meaning of Sec. 469) and share income and deductions in proportion to their ownership interests. No special form is needed for election, but permission by the IRS is needed to revoke.

 

[Samir]

Thank you for the detailed answer. So basically, the fact that they are spouses filing on the same return doesn't really matter to the IRS since the LLC is not a disregarded entity (has more than one partner), right?

 

[ColinCPA]

Thank you for the detailed answer. So basically, the fact that they are spouses filing on the same return doesn't really matter to the IRS since the LLC is not a disregarded entity (has more than one partner), right?

I'm not sure if I understand your question. An LLC, filing as a partnership, normally must file a 1065, unless considered a disregarded entity. If two spouses jointly own the partnership, they can elect to treat the entity as disregarded and file two Schedule C's on the 1040 as a qualified joint venture. The spouses must file on the same return using married filing joint status to make the election.

 

[Samir]

I'm not sure if I understand your question. An LLC, filing as a partnership, normally must file a 1065, unless considered a disregarded entity. If two spouses jointly own the partnership, they can elect to treat the entity as disregarded and file two Schedule C's on the 1040 as a qualified joint venture. The spouses must file on the same return using married filing joint status to make the election.

Your clarification cleared up my question. Thank you!

 

[The Finance Writer]

An LLC is not eligible for status as a qualified joint venture. The election for a qualified joint venture is only available for a business that is owned and operated by spouses as co-owners – not in the name of an entity created under state law, such as an LLC. However, special rules are applicable to spouses with state law entities in community property states.

 

[ColinCPA]

Thank you; I stand corrected. If you do not live in a community property state (only nine of them), an LLC or LP is not eligible to be treated as a QJV.

 

[Samir]

Thank you both so much for the clarifications!

So bottom line, an LLC with two spouses is just an LLC with two members (unless using a special rule) as far as taxes are concerned. Correct?

 

[viki32]

An unincorporated business with only couples as members or associates (or I think spouse and partner and spouse in some declares now) can opt to be handled as a certified partnership, which would be a overlooked enterprise similar to a SMLLC.