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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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Trying to determine if there is ever a case where the irs allows

Customer Question

trying to determine if there is ever a case where the irs allows married 50/50 S-Corp owners to have one passive and one active participant.
JA: Thanks. Can you give me any more details about your issue?
Customer: husband's consulting business in which he materially participates and owns 50% of s-corp. wife works a different full time job but is a 50% owner of s-corp and does not materially participate. i actually WANT passive status for me to offset passive losses. i don't have anything to do with his business except file the taxes and a bit of money managing.
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Submitted: 6 months ago.
Category: Tax
Expert:  Lev replied 6 months ago.
There is NO and there is NO may be such cases BECAUSE the statute for S-corporation requires that S-corporation may have ONLY one class of stock.That means - all shareholders are equals and income and deductions reported on K1 MUST be apportioned according to the number of shares each shareholder owns.If the apportioning is different - that is treated as having different classes of stock - and such S-corporation would be re-classified to C-corporation.So there is no passive passive status as all shareholders are equal..Another issue that shareholders may or may not be an employees of said S-corporation.Whether the shareholder is also an employee - and provides services to S-corporation - he/she would receive wages reported on W2 - that is taxable income for the shareholder but deductible expense for S-corporation.
Customer: replied 6 months ago.
Your first paragraph is incorrect. Owners of s corps can all have common stock but they have to individually meet the passive activity rules. I'm a CPA .....not the tax end but I'm looking for a real answer here.
Expert:  Lev replied 6 months ago.
You are correct - that income or loss passed to shareholders is individually classified as active or passive based on material participation.So if the shareholder does not materially participate during the yea in that business activity - the income or loss passed to that shareholder is passive.
Expert:  Lev replied 6 months ago.
However - specifically for your situation you might be aware that YOUR participation in an activity includes your spouse's participation. This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year.So it would not be possible for one spouse having passive income/loss and another spouse having nonpassive income/loss from the same activity.The statute is here (5) Participation by spouseIn determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account...I appreciate if you take a moment to rate the answer.Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you with all tax related issues.

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