Content by Jim Duffy

As you may be aware, when a corporation files an election to be taxed as an S corporation, all of the shareholders must consent to that election. If you live in a community property state, your spouse may be an owner in the corporation, even if he or she does not actually own any stock by name. The income tax regulations provide that when a stock of corporation is owned by a husband and wife as community property, both persons must consent to the election.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington, and Wisconsin are community property states. In those states, property acquired by a spouse during marriage or with marital assets is treated as owned by both spouses. In that situation, your spouse must consent to the election in order for it to be valid. As one might expect, this could be an easy thing to miss.

Fortunately, the Treasury has provided a process to obtain automatic relief for failures to obtain spousal consent in these circumstances. In order to obtain this relief, the corporation must file a statement with the service center where it files its income tax return to the effect that it is seeking relief for late filing of the shareholder consent and stating that the community property spouses have reported all items of income, gain and loss consistent with the S corporation election.

Bottom Line: If you live in a community property state, remember to have your spouse consent to the S election even if he or she is not a shareholder in name. If you forget, however, there is an easy fix.

“If I had asked people what they wanted, they would have said faster horses.”- Henry Ford