How split LLC income between spouses in tax form?

[illuminato]

My spouse and i formed an LLC in a community property state. We file taxes as MFJ . I have $200k earned income from LLC and my spouse has $0. In an LLC operating agreement, we have a 50/50 split.

Currently, our LLC has a default type (Multi-Member LLC) but we could be qualified to choose Qualified Joint Venture as well (depending on how many hours my spouse would work for the LLC).

If we go with Qualified Joint Venture LLC, should we file Schedule C with split income between us as 50/50 or can I put $200k in my schedule and she put 0?

The same question if we stay as Multi-Member LLC, should we split profit equally, or can I put $200k in my Form 1065 and my spouse have $0 in her?



What if we had an operating agreement with, say, a split of 10/90?

[Hank]

What does your CPA say?

[illuminato]

First CPA: only 50/50 split is allowed
Second CPA: any split if we go as Multi-Member LLC is allowed

[spiritrider]

First CPA is correct, 50:50 ownership allocation in a community property state. An LLC operating agreement can not override this.

As I pointed out in your earlier thread, the amount of your spouse's revenue is irrelevant to the businesses income and expense allocation. Only material participation and community property matter.

If she has task predominant hours >= 500 hours, she has 50% of the LLC's self-employed earned income. This is true regardless of filing as a partnership or the much easier QJV.

[StarTrekDoc]

Yeah llc is separate and would assume a ownership split reporting on the k1 would be proportional to ownership. That's how we report out on our k1 despite me doing much more work into the llc operations.

[MarkNYC]

Currently, our LLC has a default type (Multi-Member LLC) but we could be qualified to choose Qualified Joint Venture as well (depending on how many hours my spouse would work for the LLC).

A business owned and operated by spouses through an LLC is not eligible for the Qualified Joint Venture election.

[spiritrider]

A business owned and operated by spouses through an LLC is not eligible for the Qualified Joint Venture election.

They are in a community property state where it is.

[MarkNYC]

They are in a community property state where it is.

I have not heard that. Is there a source for that rule?

[spiritrider]

This is often overlooked, because the IRS makes such a definitive LLC QJV exclusion in the Schedule C Instructions. They vaguely "clarify" this under "community income".

Rev. Proc. 2002-69 more specifically in IRS speak, clarifies that the exclusion does not apply in community property states if certain conditions are met.

There was a more exhaustive explanation in the Tax Advisor 04/01/2019 issue.

LLC owned solely by spouses: A partnership or a joint venture?
By Susan J. Rosenberg, CPA, MST, Rockville, Md.

This is also covered more in depth in the following link to the IRS website under "Joint Ownership of LLC by Spouse in Community Property States".

[illuminato]

If she has task predominant hours >= 500 hours, she has 50% of the LLC's self-employed earned income. This is true regardless of filing as a partnership or the much easier QJV.

I was trying to find any confirmation of it on IRS website. The closet I was able to find is:

Under the IRC, a qualified joint venture conducted by a married couple who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses following in accordance with their respective interests in the venture. Each spouse considers his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C. For purposes of figuring out 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 under the provision (for example, in accordance with their respective interests in the venture).

https://www.irs.gov/businesses/small-businesses-self-employed/married-couples-in-business

I understand there is nothing about community property states but at least it looks like split should be based on interests in the venture.

[illuminato]

I also just want to understand the following. If LLC is elected to be taxed as a partnership and spouse does not meet material participation requirements, then the split will be the same as what is written in the operating agreement (e.g 10/90)? Does the same hold true even if spouses live in a community property state?

[spiritrider]

IANAL, but generally in a community property state, ownership interests are split 50:50. The IRS, the Tax Court and other courts have held this to be true even if one spouse hides a business from the other spouse.

This is a legal determination and there can be state specific details. You should seek legal counsel rather than a tax/ financial professional or answers in an anonymous internet forum.

Just like the amount of revenue brought into a partnership has no relevance to the ownership interest. Material participation has no relevance to the ownership interest.

Material participation only determines whether the partner's share of profit and expenses can be considered self-employed earned income. Only then can it be used as the basis for employer retirement plan contributions.

Even if your spouse has no revenue and does not meet the material participation requirements. They must still receive an allocation of business profit according to their ownership interest. The only difference in that case, their business profit will be considered investment income.

[illuminato]

spiritrider
Thanks you for clarification. I spoke with a business advisor, and he said that my spouse and I hold two separate businesses under one LLC and QJV doesn't work for two separate businesses' activities (for each of use) even under of LLC. we both should be involved in one/each business activity/activities. Just to clarify, I have a contract under the LLC (corp2corp) and a customer pays me based on the hours I work for them. My spouse is working on the website, and it could potentially bring me new clients (or maybe not), but it would still be pretty much separate activities. So we have to select Partnership/S-corp instead of QJV. As a simple resolution, he advised us to remove my spouse from the LLC. In this case, we will still have to file two SCH C but only one SCH SE (for me), so we will only have to pay SS taxes once (up to the maximum limit $160,200).


I am planning to get one more opinion from another business advisor / tax attorney / legal counsel, but this forum helped me form some understanding and ask the right questions when it comes to my situation.