TAX ELECTIONS FOR SPOUSES WHO OWN A LIMITED LIABILITY COMPANY

by Tina Vannucci, Fitzgibbons Law Offices

When it comes to taxation, a single-member LLC is considered a “disregarded” entity that, by default, is generally taxed as a sole proprietorship. In most cases, the member of a single-member LLC simply reports the LLC’s profits or losses on their personal tax return, and the LLC does not have to file a separate tax return.

In contrast, a multi-member LLC is, by default, taxed as a partnership and must file an informational tax return to allow the IRS to confirm that the individual members are correctly reporting their income. The LLC must also provide each member with a Schedule K-1 that reports their share of the LLC’s profits and losses for reporting on their personal returns.

Community Property LLC. One exception where a multi-member LLC can be treated as a disregarded entity and taxed as a sole proprietorship is when the LLC is wholly owned by spouses as community property. In Revenue Procedure 2002-69, the Treasury Department and IRS clarify that they will respect a taxpayer’s treatment of an entity as a disregarded entity or a partnership if it is owned solely by a husband and wife as community property.

In order to qualify to be treated as a disregarded entity:

  • The LLC must be wholly owned by a husband and wife as community property.
  • No person other than one or both the spouses would be considered an owner for federal tax purposes.
  • The business is not treated as a corporation under §301.7701-2.

In some instances, it may be to the couple’s advantage to have their LLC taxed as an S corporation. That tax treatment requires an affirmative election by the LLC and acceptance by the IRS.

Spouses who wholly own an LLC should consider the effect that their LLC’s tax designation will have on their personal tax liability and their administrative workload. That determination should be made in consultation with a tax or legal professional.

For assistance in determining your LLC’s appropriate tax designation, contact Fitzgibbons Law Offices (520-426-3824).