Married Couple LLC filing as a Disregarded Entity

by Justin Calvillo
(Longmeadow, MA)

The LLC was formed in 2004 with myself (75%) and my wife (25%). We have filed 2 returns in years 2004 - 2006: one joint personal return, one for the LLC taxed as a partnership. We have not filed for 2007 but need to by end of business on Monday. Can I elect a disregarded entity and file in one return. The LLC was formed in Delaware. We are residence and the business is located in Mass. If so, is there anything special I need to do given that we filed separate business and personal returns previously?

Answer

Use the following form to elect to have your LLC taxed as a disregarded entity (the only limited liability companies eligible for such treatment are single member LLCs and LLCs where the only two members are husband and wife):

http://www.irs.gov/pub/irs-pdf/f8832.pdf

Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.

In your situation, it's too late to elect disregarded entity status for 2007. However, you can file your Form 8832 to elect disregarded entity status going forward. Attach a copy of your Form 8832 to your partnership tax return when you file it.

QUESTION
is there any reason to continue to do the separate returns? Is there any other reason to do it besides the obvious administrative benefits?



Admin's Thoughts

If you are married, and file joint personal tax returns, I can't think of any reason why your tax situation would change going from partnership taxation(where you and your spouse are the only members of the LLC), to disregarded entity status.

So yes, the advantage of disregarded entity status are the administrative benefits.

The only advantage to keeping it separate, and this is an "advanced" topic, is that as a disregarded entity, your income and expense statements are on your Schedule C, as opposed to a separate form 1065. Now, there are tax advisors who speculate that you are less likely to be audited if you file as a partnership using form 1065 rather than as a disregarded entity using Schedule C. The statistics do somewhat support that view.

That said, even the "increased" chance of audit using a Schedule C is about 2% (meaning, you have a 2% chance of being audited in any particular year).

With proper records and receipts, an audit should be nothing to fear. Furthermore, many audits are conducted through the mail, and do not involve an IRS agent physically rummaging through your desk drawers and files.

The administrative benefits of disregarded entity status accrue each year, while the chance of an audit is slim (you have a 98% chance each year of NOT being audited).

You make the call.

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Members are Husband & Wife in a community property state

For tax purposes, can an LLC whose only members are husband and wife be treated as a single member llc in a community property state (CA)?

Answer

For income tax purposes, an LLC owned solely by husband and wife can be treated as a single member limited liability company. This includes election as a disregarded entity.

Whether the limited liability company is formed in a community property state is not relevant for this purpose--LLCs in all states can elect single member llc status if owned by a husband and wife who file their income taxes jointly.

Of course, being in a community property state will obviously have an impact on distribution of the LLC membership interests in the event of a dissolution of the marriage.

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