What is my LLC classified as by the IRS?

Rental Property Investor · Fayetteville, NC · Member since 2017 · 82 posts · 23 votes

I have a LLC with my wife and I listed as members under the Articles of Organization. Does the IRS consider this LLC as a sole Proprietorship? Also, since it's a pass through entity, I don't need to file a separate return for the LLC, correct? Thanks for the help!

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Natalie KolodijBusiness Member

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Nope I was right the first time haha

I second guessed my self

The QJV IRS instructions list C/F

The Sch E instructions talk about it though

If the husband and wife owned it in their personal names they could elect QJV. But if owned through an LLC the IRS defers to state law, which is why community property state comes into play.

So your CPA is wrong...

A Business Owned and Operated by the Spouses through a Limited Liability Company Does Not Qualify for the Election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to married couple state law entities in community property states."

https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorporated-businesses?fbclid=IwAR06LmBOexEqsr3tqd1sirp3nxi-niD9eUCOQYE5z1hN-pWZxsvSi_glg38

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Nope.
You added two of you to an LLC- now it's a partnership and you need to file a 1065.
The only time this isn't the case is if you're in a community property state.
You DO need to file a separate tax return now. A pass through just means that income/tax payment is passed through to your personal return- and you pay tax based on your 1040.
You may way to see about changing to a SMLLC potentially. I'd consult with a tax pro and see if a Pship makes sense for your situation.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Natalie Kolodij:
Nope.
You added two of you to an LLC- now it's a partnership and you need to file a 1065.
The only time this isn't the case is if you're in a community property state.
You DO need to file a separate tax return now. A pass through just means that income/tax payment is passed through to your personal return- and you pay tax based on your 1040.
You may way to see about changing to a SMLLC potentially. I'd consult with a tax pro and see if a Pship makes sense for your situation.

Natalie answered that 100% correct. You technically can amend your articles to adjust membership until the due date of the tax return. Most clients initially want to avoid the additional tax return until they have a developed portfolio. Now, I will also say that you need to maintain a balance sheet for your investments over the long haul. It is a great thing to do and a major advantage of a partnership is that you are required to maintain one as well as track contributions and distributions.
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Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
6y
@Natalie Kolodij
Would the community or not community state be important here when we are talking federal return?
I would have thought that what mattered was if they are both filing a single tax return or not. In case of a single tax return, I would have thought that for the IRS it is then a single taxpayer and the LLC would be disregarded.
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Navid A.
OP
Rental Property Investor · Fayetteville, NC · Member since 2017 · 82 posts · 23 votes
6y
@Natalie Kolodij, thanks for the reply. I talked to my CPA today and this is what she replied with, "There is a rule that allows married couples who are joint LLC members to report the income on their personal return. A separate return will not be necessary."
Is my CPA misinformed? My LLC is registered in NC, not a community property state.
Are there any advantages of having my wife as a member of the LLC? She's currently working a separate W2 job as well and will be for the next few years. I would appreciate your advice on this, perhaps even schedule a consult since you're also in NC? ...not sure if my CPA specializes much in RE.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Navid A.:
@Natalie Kolodij, thanks for the reply. I talked to my CPA today and this is what she replied with, "There is a rule that allows married couples who are joint LLC members to report the income on their personal return. A separate return will not be necessary."
Is my CPA misinformed? My LLC is registered in NC, not a community property state.
Are there any advantages of having my wife as a member of the LLC? She's currently working a separate W2 job as well and will be for the next few years. I would appreciate your advice on this, perhaps even schedule a consult since you're also in NC? ...not sure if my CPA specializes much in RE.

It's possible to elect to be a QJV with the IRS as well but there are rules for making the election if you're in a non CP state.
Both spouses need to materially participate - basically both need to be active in the business. And the income/expense will all be split up and reported on two different schedule E's.
So not a huge benefit IMO.
If your wife isn't involved I would ask an attorney if there is a benefit to the both being on the LLC since tax wise the difference is what we just went over.

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Nope I was right the first time haha
I second guessed my self
The QJV IRS instructions list C/F
The Sch E instructions talk about it though
If the husband and wife owned it in their personal names they could elect QJV. But if owned through an LLC the IRS defers to state law, which is why community property state comes into play.
So your CPA is wrong...
"

A Business Owned and Operated by the Spouses through a Limited Liability Company Does Not Qualify for the Election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to married couple state law entities in community property states."

https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorporated-businesses?fbclid=IwAR06LmBOexEqsr3tqd1sirp3nxi-niD9eUCOQYE5z1hN-pWZxsvSi_glg38

Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Mike S.:
@Natalie Kolodij
Would the community or not community state be important here when we are talking federal return?
I would have thought that what mattered was if they are both filing a single tax return or not. In case of a single tax return, I would have thought that for the IRS it is then a single taxpayer and the LLC would be disregarded.

See below - 2 people on an LLC create a partnership and 1065.
So if you've done that in an entity they fall to state laws- so only if the state considers them "1 person" can we disregard that 1065

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Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
6y
Originally posted by @Natalie Kolodij:

See below - 2 people on an LLC create a partnership and 1065.
So if you've done that in an entity they fall to state laws- so only if the state considers them "1 person" can we disregard that 1065
I love BP, I learn new stuff everyday :-)

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Josh Dixon
Accountant · Frisco, TX · Member since 2019 · 16 posts · 4 votes
6y
Hi @Navid A., @Natalie Kolodij is correct. You are required to file a partnership tax return since you are a multi-member LLC and the IRS paperwork should state that on the SS-4 form that you received when you got your Tax ID number.
To help clarify the comm. prop issue. In comm. property states, you are allowed to consider an LLC to be a disregarded entity if it is formed by a husband and wife who file a joint return, and only if you indicated that when applying for the EIN/Tax ID. I'm in TX (comm. prop) and I get people all the time who are surprised when they find out they have to file a tax return, because they filled out the paperwork wrong, usually because they applied for their own EIN. Sometimes it pays to get advice before doing something.

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Navid A.
OP
Rental Property Investor · Fayetteville, NC · Member since 2017 · 82 posts · 23 votes
6y
@Josh Dixon @Natalie Kolodij, thanks for clearing this up for me! Much appreciated. I reviewed the IRS letter for my EIN number and it does confirm they want a 1065 filing for it. I did some research with my state and found the proper form needed to file an amendment to my Articles of Organization to remove my wife as a member. There's only a $50 filing fee. Would this be sufficient to avoid a separate filing requirement before year end? I'm hoping this will be the solution to all this. Goes to show that not all CPAs are created equal. Had I listened to my CPA's guidance, I would've been in the hole. Needless to say, I will be needing a new CPA!
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Navid A.:
@Josh Dixon @Natalie Kolodij, thanks for clearing this up for me! Much appreciated. I reviewed the IRS letter for my EIN number and it does confirm they want a 1065 filing for it. I did some research with my state and found the proper form needed to file an amendment to my Articles of Organization to remove my wife as a member. There's only a $50 filing fee. Would this be sufficient to avoid a separate filing requirement before year end? I'm hoping this will be the solution to all this. Goes to show that not all CPAs are created equal. Had I listened to my CPA's guidance, I would've been in the hole. Needless to say, I will be needing a new CPA!

Very true
I amend a fairly equal amount of self prepared, H&R block prepared, EA Prepared, and CPA prepared returns every year.
Across the board there are very few who are fully knowledgeable in REI.
Removing your wife will default the LLC back to a single member and not require a partnership filing- then it will be ignored for federal tax reporting.
Feel free to share that info with your CPA too- Who knows how many other people they've told this same thing to.

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Josh Dixon
Accountant · Frisco, TX · Member since 2019 · 16 posts · 4 votes
6y
@Navid A. (@Natalie Kolodij) removing her from the Articles will update the state's records but will no longer fix the IRS. Normally that would cause what the IRS calls a technical termination, but those are no longer allowed. So you would need to also file a Form 8832 (Entity Classification Election) which can take a while for the IRS to process and get approved, or file a final return and then apply for a new EIN and a new name and re-file with the state (usually cheaper and faster, but stinks if you like your company name). Or you could just keep it a partnership with your wife and you'll just have to file 2 returns each year.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Josh Dixon:
@Navid A. (@Natalie Kolodij) removing her from the Articles will update the state's records but will no longer fix the IRS. Normally that would cause what the IRS calls a technical termination, but those are no longer allowed. So you would need to also file a Form 8832 (Entity Classification Election) which can take a while for the IRS to process and get approved, or file a final return and then apply for a new EIN and a new name and re-file with the state (usually cheaper and faster, but stinks if you like your company name). Or you could just keep it a partnership with your wife and you'll just have to file 2 returns each year.

There hasn't been an initial return filed.
I would remove the second and just respond to an IRS notice received. The Partnership hasn't had any activity.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Josh Dixon:
@Navid A. (@Natalie Kolodij) removing her from the Articles will update the state's records but will no longer fix the IRS. Normally that would cause what the IRS calls a technical termination, but those are no longer allowed. So you would need to also file a Form 8832 (Entity Classification Election) which can take a while for the IRS to process and get approved, or file a final return and then apply for a new EIN and a new name and re-file with the state (usually cheaper and faster, but stinks if you like your company name). Or you could just keep it a partnership with your wife and you'll just have to file 2 returns each year.

You're incorrect. It is not a technical termination as you are amending to correct the formation error. The second option is to file an Action by Consent to correct it as of the beginning of the entity prior to returns being filed. Once the terms are agreed to it would now be a SMLLC. Both can be a manager, but you may not want both to have ownership. You should also file Form 8832 to correct it with the IRS ahead of time. Note this can be retroactively filed for an entity that incorrectly classified itself. Yes, you may end up with a letter from the IRS requesting a partnership return at which point, you would just need to address it if a letter was written.

You have no idea how many of these I have had to correct.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Navid A.:
@Josh Dixon @Natalie Kolodij, thanks for clearing this up for me! Much appreciated. I reviewed the IRS letter for my EIN number and it does confirm they want a 1065 filing for it. I did some research with my state and found the proper form needed to file an amendment to my Articles of Organization to remove my wife as a member. There's only a $50 filing fee. Would this be sufficient to avoid a separate filing requirement before year end? I'm hoping this will be the solution to all this. Goes to show that not all CPAs are created equal. Had I listened to my CPA's guidance, I would've been in the hole. Needless to say, I will be needing a new CPA!

Yes, that is correct. All you will need to do file that amendment and show the effective date as it actually is. Such "partnerships" can make said election prior to the due date of the tax return.
[email protected]224-381-2660
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Natalie Kolodij:
Originally posted by @Josh Dixon:
@Navid A. (@Natalie Kolodij) removing her from the Articles will update the state's records but will no longer fix the IRS. Normally that would cause what the IRS calls a technical termination, but those are no longer allowed. So you would need to also file a Form 8832 (Entity Classification Election) which can take a while for the IRS to process and get approved, or file a final return and then apply for a new EIN and a new name and re-file with the state (usually cheaper and faster, but stinks if you like your company name). Or you could just keep it a partnership with your wife and you'll just have to file 2 returns each year.

IThere hasn't been an initial return filed.
I would remove the second and just respond to an IRS notice received. The Partnership hasn't had any activity.

I pray for the day BP allows GIFs. *Insert Mic Drop GIF*
[email protected]224-381-2660
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Navid A.
OP
Rental Property Investor · Fayetteville, NC · Member since 2017 · 82 posts · 23 votes
6y
Thanks everyone, learned a lot in this thread. Mostly that CPAs can't agree on anything haha. But really, great information all the way around. I will make the amendment immediately and will also file the 8832 with the IRS. Hopefully won't get an IRS letter, but if I do, how should I respond? Just tell them that the Articles of Organization was amended on X date?
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Claude S.
Investor · Savannah, GA · Member since 2016 · 79 posts · 62 votes
6y
@Navid A. Or just close this multi member LLC and open a new single member LLC.
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Navid A.
OP
Rental Property Investor · Fayetteville, NC · Member since 2017 · 82 posts · 23 votes
6y
@Claude S.
I already own property under the LLC and prefer not to do another quid claim transfer. A new LLC will also cost an additional $225 vs $50 for the amendment.
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