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Certified Public Accountants


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LLC Owned Solely By Spouses: A Partnership Or A Joint Venture?

Ordinarily, a domestic entity with two or more owners is classified as a partnership for federal tax purposes. If a qualified entity, and a married couple as community property owners of the entity, treat it as a disregarded entity for federal tax purposes, the IRS will accept the position that it is a disregarded entity. If a qualified entity, and a married couple as the owners of the entity, treat it as a partnership for federal tax purposes, the IRS will accept the position that it is a partnership for federal tax purposes.

A business entity is a qualified entity if:

  • The business entity is owned solely by a married couple 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 Regs. Sec. 301.7701-2.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.

A business owned by a married couple as tenants by the entirety should also qualify to be treated as a disregarded entity since the tenancy is a single ownership. The law in the state where the spouses are domiciled should be consulted.

Sec. 761(f) allows a qualified joint venture conducted by spouses filing a joint return to not be treated as a partnership for federal income tax purposes. A qualified joint venture is the conduct of a trade or business if:

  • The only members of the joint venture are the spouses;
  • Both spouses materially participate (within the meaning of Sec.      

    469(h), ignoring paragraph (5) thereof) in the business; and

  • Both spouses elect this treatment.

If joint venture status is elected, each spouse files a Schedule C, Profit or Loss From Business, Schedule E, Supplemental Income and Loss, or Schedule F, Profit or Loss From Farming, as appropriate, to report his or her share of the items of income, gain, loss, and deduction. This election is not available if the business is conducted through a state law entity such as a partnership or a limited liability company (LLC), according to the instructions for Form 1065, U.S. Return of Partnership Income.

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May your choices reflect your hopes, not your fears.

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Qualifying As A Real Estate Professional

In Antonyshyn, the court upheld the IRS’s findings that the taxpayers had losses in the years 2009-2010 that were passive losses and not deductible against other income. The taxpayers owned six residential rental properties located in five different states — none in their home state of California. They hired management companies for four of the properties, which were located in Georgia, Missouri, and North Carolina, to handle daily operations, including collecting rents, interacting with tenants, and arranging for maintenance as needed. The other two properties were not leased out during the years under audit. The court found that most of the taxpayers’ time spent on the activities was not for daily operations but was for activities related to being investors, which is generally not counted as participation. Therefore, the wife did not qualify as a real estate professional under Sec. 469(c)(7). In addition, the court noted the taxpayers kept poor records, which were not credible in many instances. Having consistent activities that qualify as real estate management or keeping daily time sheets will support the taxpayers assertion that they are real estate professionals.

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IRS Reevaluating Active Trade Or Business Requirement For Spinoffs

The IRS announced on Thursday that it is reviewing its approach to the active trade or business requirement that must be met for a five-year period for a business to qualify for a tax-free spinoff under Sec. 355 and, as a result, is suspending two revenue rulings, Rev. Ruls. 57-464 and 57-492, in which it previously ruled on the topic (Rev. Rul. 2019-09). The suspended rulings addressed the active trade or business requirement under Secs. 355(a)(1)(C) and (b).

Rev. Rul. 57-492 involved a corporation engaged in refining, transporting, and marketing petroleum products, which began a separate operation to find and produce oil. The separate operation to produce oil did not include any income-producing activity or source of income until less than five years before its separation from the primary refining, transportation, and marketing operation, so the IRS ruled that the exploration and production operation did not satisfy the active trade or business requirement.

The IRS is conducting a study to determine, for purposes of Sec. 355, “whether a business can qualify as an [active trade or business] if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected.” The IRS stated that the active trade or business analysis underlying the holdings in the two revenue rulings relies in a significant part on the lack of income generated by the activities under consideration, and, consequently, these rulings could be interpreted as requiring income generation for a business to qualify as an active trade or business. Thus, it is suspending the revenue rulings until the completion of the study.                         Contact us for more information

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