Converting LLC to QJV


Today TaxMama® hears from Gary in the TaxQuips Forum with this tale. “During 2011 my wife and son-in-law formed an LLC in the State of Indiana. During 2011, no income was received, and only expenses were incurred as part of the start-up. Last week our son-in-law decided that he no longer is interested in being a member of the LLC. Now, as husband, I am wanting to convert the LLC into a Qualified Joint Venture (“Husband and Wife”).”

 

Dear Gary,

First of all, in order to claim the start-up costs as deductions, the business must have started. This one has not. So, at this point, those expenses are just sitting there, capitalized, until a business starts.

When it starts to generate income, in the first year, you can deduct the first $5,000 of start-up costs as business expenses, instead of amortizing them over 15 years.

WILL it be starting? What will it be doing?

About converting to a QJV? That’s a good question. You’ve been doing some reading!

OK. It’s an LLC. The default filing for an LLC with two members is as a partnership. Yes, you can elect NOT to file as a partnership, and instead file TWO Schedule Cs on your personal tax return as a Qualified Joint Venture. But why?

To avoid the separate cost of a partnernship return? OK. That’s a good reason. If your business will be having employees, filing this way gets really complicated. If it doesn’t, you’re fine. Go ahead and make the election.

However, an LLC cannot file as a QJV. Only a partnership can. (Scroll down on this IRS page.)

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 husband and wife state law entities in community property states.

Indiana is not a community property state – so, nope. You can’t do this. You will have to file as a partnership – or elect to file as a corporation. File year 1 with zeroes for income and expense. In year 2, once you have activity, you can pick up the year 1 start-up costs.

And remember, you can find answers to all kinds of questions about LLCs and other tax issues, free. Where? Where else? At www.TaxMama.com.

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