Are a husband and wife that own a 50 percent interest in an LLC required to file a partnership income tax return?

The legal reasoning behind the answer to this question is based on the Internal Revenue Service's (IRS) guidance on the classification of entities for federal tax purposes. According to the IRS, a business entity with two or more members is classified for federal tax purposes as either a corporation or a partnership. A business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.In the case of a husband and wife owning an LLC, the IRS provides specific guidance. The IRS will respect a taxpayer's treatment of these entities as either disregarded entities or partnerships. This means that if a qualified entity, such as an LLC owned solely by a husband and wife as community property, treats the entity as a partnership for federal tax purposes and files the appropriate partnership returns, the IRS will accept the position that the entity is a partnership for federal tax purposes.

However, if the husband and wife do not file any income tax returns indicating how they wish to treat the LLC for federal tax purposes, the classification of the LLC defaults to the 'check the box' regulations. Under these regulations, if there are two owners of the business, it is automatically by default a partnership. If there is one owner of the business, it is automatically by default a disregarded entity.

Therefore, a husband and wife that own a 50 percent interest in an LLC are required to file a partnership income tax return if they treat the entity as a partnership for federal tax purposes. If they do not make an election or file any income tax returns indicating how they wish to treat the LLC, the LLC is automatically considered a partnership by default, and they are required to file a partnership income tax return.

However, it's important to note that the husband and wife have the option to treat the LLC as a disregarded entity. If they choose to do this, they would not be required to file a partnership income tax return. Instead, the activities of the LLC would be treated in the same manner as a sole proprietorship, branch, or division of the owner.In conclusion, a husband and wife that own a 50 percent interest in an LLC are required to file a partnership income tax return if they treat the entity as a partnership or if they do not make an election or file any income tax returns indicating how they wish to treat the LLC. However, they are not required to file a partnership income tax return if they choose to treat the LLC as a disregarded entity.

Sources:

Publication 1635 (2/2014)

ECC 200851102

ECC 201411035

Publication 533

§ 761. Terms defined

Rev. Proc. 2002-69