domiciled in comm prop state but llc in non-comm state

Hi all -
The client is CA resident and he formed an AL LLC, husband-and-wife joint ownership. The AL LLC has a rental property and earns rental income. I am not sure whether I can just file sch C or I should file 1065 for this AL LLC. They are domiciled in community state (CA) but LLC is incorporated in Non-community state (AL). I think they can file sch C and treat the LLC as disregarded since the LLC ownership is community asset based on their residency state. I am mostly concerned that if we report it on sch C then he will get a notice from AL that he should have filed Form 65 as husband and wife are counted as two in AL. Or won't he get notice since sch C is filed and considered as disregarded entity?

Being in Alabama, I can tell you that I am quite sure that Alabama will not send a letter about failure to file an AL Form 65 partnership tax return. Especially for an LLC that hasn't previously filed an AL Form 65 partnership tax return.

On the other hand, regardless of whether you go with Sch. C or Form 1065, you need to be sure to file the AL Form PPT business privilege tax return. The tax payment is due March 15 if they file a Form 1065; it's due April 15 if the LLC is a disregarded entity owned by an individual. The form filing due date is automatically extended 6 months if the tax was paid on time. Alabama will definitely send you a letter if you miss the payment or the form.

Regarding the community state issue questions, I will leave that to the experts.

Just my opinion. An LLC with one member could be disregarded, but with two members it would be a partnership or could be treated as a Corp (or S-Corp with election). Maybe one of you CPAs or Attorney's have different information. So I think it should be filing Form 1065 and equivalent state form and issue K-1 for the personal tax returns.

Check the EIN on IRS.gov for filing requirements for federal return.

Thanks for your input. I am aware that 1065 is required when there are two or more members in the LLC. I am referring to a situation where the llc is owned by married couple. (https://www.irs.gov/businesses/small-bu ... -companies)

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.

My question here is which state law should I be applying? where the LLC incorporated? or where the couple resides? when it comes to meeting the definition of qualified JV?

for the IRS stance on your position-- Per Rev Proc 2002-69:

To alleviate this uncertainty and in the interest of administrative simplicity, this revenue procedure provides that the Internal Revenue Service will respect a taxpayer’s treatment of these entities as either disregarded entities or partnerships.
This revenue procedure provides guidance on the classification for federal tax purposes of a qualified entity (described in section 3.02 of this revenue procedure) that is owned solely by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States.

Also, per Section 3.02:

Qualified 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 a 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 § 301.7701-2.

However, in your case, sounds like you need Sch E, not Sch C.

The AL LLC should be community property under CA law. Ca. family Code section 760: "Except as otherwise provided by statute, all property, real or personal, WHEREVER SITUATED, acquired by a married person during the marriage while domiciled in this state is community property."

ha right. sch E. what was i thinking. thanks all