Husband and wife LLC

[BobH]

Husband and wife have a dozen rental properties and each property is a separate LLC with husband and wife as members.  Is there any authority for reporting these rentals on Schedule E and not filing a 1065 for each rental?  Schedule E has been used in the past.  They are new clients.

[jklcpa]

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.

[Lee B]

The logic behind having each property as a separate LLC is for legal liability protection. 

Not treating the LLC as separate entities for tax filing purposes may create legal liability protection problems.

A knowledgeable attorney in your state should be consulted before you decide how to file.

[jklcpa]

Filing 1065s for the LLCs also removes a great amount of detail from the 1040 and gives the appearance of being separate from the individual return, no comingling of assets, etc.

[mcb39]

I have one business that files two separate Schedule Cs as a Qualified Joint Venture.; 

[mcb39]

Instead of a Partnership return.  Maybe this is only allowed in Community Property States.

[kathyc2]

Like previously stated, unless in a community property state, there should be a dozen 1065's.  I wouldn't put a lot of time in this return until you tell them the fee to prepare the 1065's.  I'm guessing they may not want to pay and go to someone who would continue to handle it incorrectly even though it may circumvent the legal protection they tried to achieve by setting up all the different LLC's. 

[Abby Normal]

Devil's advocate: If you had a single member LLC for a rental, you would put it on Sch E. Are you saying that LLC doesn't provide legal protection? If all rents are paid to the LLC and all expenses paid from the LLC, isn't that adequate for legal protection?

None of us are lawyers, as far as I know. I would explain all of this to the clients and just keep putting them directly on the Sch E. The IRS won't care because going the 1065 route just increases their cost of processing returns and K1s, and there is no additional tax or penalties the IRS can assess, as long as the 1040s are timely filed.

[kathyc2]

24 minutes ago, Abby Normal said:

Are you saying that LLC doesn't provide legal protection?

I'm guessing the way a lot of them are handled, there is not a lot of protection.  How many times do people just go to the SOS site and form the LLC without having so much as Articles of Organization?  Do they have documented meetings?  Do they keep all transactions with members at an arms length transactions?

If they need to use the protection, it's likely they are being sued.  Plaintiff can subpoena documents to see if they are following the rules and requirements of an LLC, or if they are just using the LLC name.  

At the very least have them talk with an attorney regarding piercing the veil and then sign off that you have advised them a Sch E is not correct method.

[DANRVAN]

13 hours ago, mcb39 said:

have one business that files two separate Schedule Cs as a Qualified Joint Venture.; 

 If they are not operating as an LLC they are a QJV under section 761(f)(2)

10 hours ago, mcb39 said:

Instead of a Partnership return.  Maybe this is only allowed in Community Property States.

If they are an LLC and if held as community property they can rely on rev. proc. 2002.69 and elect out of filing  a 1065.

It is basically a two prong test depending on whether they are an LLC or not:

-if not an LLC go to sec. 761(f)

-if an LLC go to 2002-69.

[Randall]

I tell clients the legal protection is between them and their attorney.  I can't comment on that.  But for tax purposes, I tell them 1065.  Even if it comes out the same in the end.  I have some clients with multiple rental properties, two owners (not husband and wife).  They use single member LLCs to own each property and the single member is a two member LLC with both partners.  SMLLCs are disregarded and the two member LLC files the 1065.  Only one 1065.

[schirallicpa]

Honest to God I swear "LLC" creation has become an industry of its own.  

[Randall]

3 hours ago, schirallicpa said:

Honest to God I swear "LLC" creation has become an industry of its own.  

Yes, these are absurd.  And organizing as one entity and electing to be taxed as another entity.  Who thinks up this stuff?  I'm not an attorney but the so called protection sounds like a load.  Small business people don't conduct themselves as said entity.  I had one client years ago (sole proprietor), built a garage for his customer.  Never got paid.  He sued the customer for payment, the customer sued him back, my client lost, never received payment, had to pay him $25k.  Then an attorney suggested he work as an LLC.  Ha.  

[Lee B]

4 hours ago, schirallicpa said:

Honest to God I swear "LLC" creation has become an industry of its own.  

Kind of like the promotions I receive for "Living Trust Seminars with a free dinner"

[Lee B]

48 minutes ago, Randall said:

Yes, these are absurd.  And organizing as one entity and electing to be taxed as another entity.  Who thinks up this stuff?  I'm not an attorney but the so called protection sounds like a load.  Small business people don't conduct themselves as said entity.  I had one client years ago (sole proprietor), built a garage for his customer.  Never got paid.  He sued the customer for payment, the customer sued him back, my client lost, never received payment, had to pay him $25k.  Then an attorney suggested he work as an LLC.  Ha.  

In my state a licensed contractor would be able to file a lien against the property built in order to ensure payment.

[mcb39]

On 1/29/2024 at 2:45 PM, mcb39 said:

Instead of a Partnership return.  Maybe this is only allowed in Community Property States.

I am not here to rob them.  I am here to help them.  Believe it or not, this is a very small business and they came to me set up as an S-Corp., and were paying mega bucks for their tax prep.  I want to do what is best for my clients.  I could have set up a Sm Partnership, but why?  Just to get paid for filing another return?  I  charge them what I think is plenty and still don't come near to what they were paying before.  Ethics!!!!!