COUPLE OWNED LLC

[KATHERINE]

Hi dear team here,

I have a question: last year, there was an LLC owned by a couple, since they came late and I dont have enough information and it was pasted 03.15.   So, I filed it as two schedule C for that LLC on husband and wife.   Now, it seemed like it was a state registered LLC and then I filed 2020 extension for 2020.   Should I file 8275 to submit myself to void the not filing penalty?   The reason they came late because the previous account was very sick.

Any advice is appreciated.

Thank you!

Kate

 

 

[jklcpa]

Technically speaking a husband-wife LLC can be treated as a disregarded entity but only if in a community property state.  The problem is for those not in community property states, then the IRS would be looking for a partnership return.

It's been about 6 years since I originally wrote this, but here is a quote that I continue to repost each time this subject comes up:

 

Quote

Determining whether or not a husband-wife LLC is a disregarded entity is a matter of state law. If the LLC is formed in a state that is NOT a community property state, the LLC defaults to a partnership unless an election is made to be treated as a corporation.

The exception is where the LLC is set up in a community property state and meets the exceptions in Rev Proc 2002-69.  If it meets the criteria, it is considered a "qualified entity" and may be treated as a disregarded entity for federal tax purposes.  The IRS will accept this position for federal tax purposes. Likewise, LLC may file as a partnership for federal tax purposes and the IRS will accept that position also.  Consistency in filing from year to year is key, otherwise a change in filing is considered a conversion of the entity.

The requirements under 2002-69 for the LLC to be a "qualified entity" are:

• The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
• No person other than one or both spouses would be considered an owner for federal tax purposes; and
• The business entity is not treated as a corporation under the applicable Treasury Regulations.

None of the above addresses state reporting. Please check your state's law to verify that filing as a disregarded entity is acceptable

 

[KATHERINE]

Thank you, Judy!  I felt the same way, I have to file 2019 a F1065 and attach a disclosure to void penalty.  It was a new company if the disclosure fails, then I may try first time abatement because it is a late to file case.  Thank you again!

[Lion EA]

Wait until they receive a penalty letter and then try this:

ABC qualifies for an exception to the penalty you charged under IRC Section 6698(a)(1), because all two (2) partners, XZ, 222-22-2222, and YZ, 333-33-3333, reported all their shares of income and deductions timely on their joint 2019 income tax return Form 1040.  Therefore, the partnership meets the criteria specified in Rev. Proc. 84-35, which says in part:  “A domestic partnership composed of 10 or fewer partners and coming within the exception outlined in section 6231(a)(1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so required by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.”

We trust that you will remove the penalty due to reasonable cause for small companies.