A husband and wife are 50/50 owners of an S-Corp.  The husband actively participates and runs the business.  The wife is not listed as an Officer, but is listed as a Director.  Other than that, she has no day to day participation in the business.  This S-corp is located in CA (a community property state).

The husband receives a reasonable wage via W-2.  The wife receives no W-2 wages from the business (or from anywhere else for that matter).  The S-corp has a $150k profit on the 2020 tax return.  Each K-1 issued reports $75k of ordinary income.  The client reported the wife's $75k share as passive income on the Schedule E of their MFJ 2020 personal tax return (and on the  Net Investment Income Tax Form 8960).

Is this the correct way to do this?  Does it have to be done this way since she doesn't materially participate in the business?  Does it make any difference that they are in a community property state (I don't think so, but not 100% sure).

Thanks in advance for your help and advice!