LLC for Rental homes Schedule E

[singh]

My client, husband and wife, established a LLC (Limited Liability Co.) for themselves in 2022 for a 5plex and a rental house. They are the only members. This year I have to file their tax as LLC. This tax return is for California.

Do I need to fill any Forms other than the Schedule E which I have been filling in the past?

Do they have to pay SE (self-employment tax) which I believe they don't have to?

I am checking the BOX M on Sch. E (Filing this Sch. E as LLC).

Any help will be greatly appreciated.

[JOFI]

The LLC designation impacts their legal status and shouldn't really affect their tax filing.  I would continue filing their returns as in prior years, with a Schedule E to report their rental income.  You can add their LLC filing costs as a deductible expense on Schedule E.

[singh]

Thank you so much for your input. I had not thought about the LLC filing costs. I thought I was the only one awake at 3:00 AM (California).

[Camp1040]

"husband and wife, established a LLC (Limited Liability Co.) for themselves in 2022 for a 5plex and a rental house"

Single member LLC or did they create a MMLLC which would be a partnership on the federal level.

[singh]

No, Camp 1040, they did not create MMLLC. They created the name as Japson which is one of their rental house. Only husband and wife are the members.

Do you think husband and wife as members would be MMLLC? 

[Just-Lisa-Now-]

Yes, CA is going to want a  a 568 filed, and their $800 LLC fee.   Marking the LLC box on the Sch E will make those figures flow to the 568

Make sure youve downloaded the CA LLC module in Updates > Select and Download new Products

[Camp1040]

If your LLC has one owner, you're a single member limited liability company (SMLLC). If you are married, you and your spouse are considered one owner and can elect to be treated as an SMLLC.

No MMLLC then.

[sjrcpa]

Not quite. 1 husband + 1 wife = 2 people = multimember.

I believe in California, a community property state, a husband and wife can choose to ignore the LLC and treat as a joint venture on Schedule E. CA practitioners please weigh in.

In noncommunity property states, once they've mucked it up with an LLC they can't. Unless the ownership is tenants by the entirety. That's one owner. This form of ownership is not available in all states.

[sjrcpa]

"they did not create MMLLC"

"Only husband and wife are the members."

1+1 = 2

[abctax55]

Weighing in here.... from the Left Coast...

Susan is correct for CA 'husband & wife' LLC's.   You do have to still file the F 568, and pay the $ 800 minimum tax; and the LLC fee on gross receipts IF the receipts hit the limit.

[singh]

Now I am confused whether to go by what Camp says or to go by what Sjrcpa says.

Yes I will file Form 568, and their income is below the limit so they won't be paying the fee other than the $800 tax. 

I still don't know whether it is SMLLC or MMLLC.

[Terry53029 · Accepted solution]

Here is what the IRS says, they agree with @sjrcpa. Here is the link:

https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-compan.... 

Joint Ownership of LLC by Spouse in Community Property States

Rev. Proc. 2002-69 addressed the issue of classification for an entity that is solely owned by husband and wife as community property under laws of a state, a foreign country or possession of the United States.

If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:

• Disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.
• Partnership for federal tax purposes, the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes.

A change in the reporting position will be treated for federal tax purposes as a conversion of the entity.

A business entity is a qualified entity if;

1. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
2. No person other than one or both spouses would be considered an owner for federal tax purposes; and
3. The business entity is not treated as a corporation under IRC §301.7701-2.

Note: If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be "qualified joint ventures" (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses.

[Camp1040]

If you have been here awhile @sjrcpa is the smart one.

[singh]

Thank you so much, Terry, sjrcpa, Just-Lisa-Now and everyone else who helped me out with LLC question. 

[singh]

Hi Lisa, I am not able to locate the Form ca 568 anywhere although I saw somewhere that this form was released on 01/19/2023. Can you please let me know step by step how to download this form.

[Just-Lisa-Now-]

You need to install it from Update > Select and Download New Products  Once its installed it will appear in the list of states available when you hit the ST button on the toolbar

[singh]

Thank you so much, Lisa, for your help. You are of so much help.

[skyworks]

Hi sjrcpa,

"In noncommunity property states, once they've mucked it up with an LLC they can't. Unless the ownership is tenants by the entirety. That's one owner. This form of ownership is not available in all states."

I have a client husband and wife formed LLC, transferred (deeded) all their rental properties to LLC.

Would this be the exception of what you mean "tenants by the entirety"? They want file report rental business under personal return instead of partnership which IRS EIN confirmation letter indicated the LLC file form 1065.

The properties located in Massachusetts; Mass allows three types of joint ownership.

[DeDee]

I beleive you have to look at how the property is titled.  If they are joint with the right of surviviorship they each own 100% and therefore are one entity and the income therefore is joint income..  Whereas, if they are Tenants in Common they own 50/50 each and the income is divided so would be two entities.  

[DeDee]

Case in point would be if the property was owned prior to marriage, it would be owned by one spouse under an LLC, but might be filed as joint income too.