MFJ with 2 Schedule C's involved with same activity

[origun]

I have new clients who work selling on eBay and make quite a bit of money. They seem to have good records and are on the up-and-up. They always file 2 Schedule C's, dividing the income and expenses between the 2 spouses. There seems to be no way for me to really determine how to split things according to effort expended. They don't seem to want to hide anything except they would like to not split 50-50 (which was done last year) but instead 25-75 to keep the income of one spouse (under age 66 but collecting SS) below the threshold for having to repay SS. Is there a problem doing it that way? Total income and taxes on the 1040 will be virtually the same as if split 50-50.

[Gretel]

As far as the tax return goes it doesn't matter too much. For Social Security purposes it should reflect the actual situation like hours worked if both have the same "pay per hour".

I have heard of a case in a seminar where a taxpayer applied for SS and for whatever reason SS found out that although moneys were paid into SS through SE, that person never did any actual work and they did not pay SS to him.

[taxea]

If they are engaged in two separate businesses then each Sch C should reflect the income and expense of that business. They know they can't combine the businesses as one and do one Sch C.
What about creating a partnership with one having a larger percentage than the other?

[Koss]

Qualified Joint Venture

They don't need to establish a partnership. Based on the fact pattern in the original post, they already have a partnership. But they don't have to file a partnership return.

I agree that the allocation of income and expenses should be fact-based, and should not be an arbitrary number invented out of thin air.

They don't have two separate businesses. They have a single business operated by a husband and wife.

From the instructions for Schedule C (2009):

Husband-Wife Business

Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C or C-EZ. Instead, file Form 1065. See Pub. 541 for more details.

Exception—Qualified Joint Venture

If you and your spouse each materially participate (see Material participation on page C-3) as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.

Note. Mere joint ownership of property that is not a trade or business does not qualify for the election.

Making the election. To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C, C-EZ, or F. On each line of your separate Schedule C, C-EZ, or F, you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE to pay self-employment tax, as applicable.

If you have employees or otherwise need an employer identification number (EIN) for the business, see www.irs.gov, keyword “qualified joint venture,” for more information.

Once made, the election can be revoked only with the permission of the IRS. However, the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements for filing the election. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture.

Sounds like this couple already made the election.

Caution: There are some special rules that can make this affair a lot more complicated if the couple lives in a community property state.

BMK

[origun]

Thanks for your input. It is a single venture, not 2 separate ones, and I believe Koss's description of an election to file as a joint venture applies. They have filed separate Schedule C's and SE's in the past. I just need to ask more questions to ascertain whether the 75-25 split of income and deductions that they have suggested is a valid one.

[taxea]

They don't need to establish a partnership. Based on the fact pattern in the original post, they already have a partnership. But they don't have to file a partnership return.

I agree that the allocation of income and expenses should be fact-based, and should not be an arbitrary number invented out of thin air.

They don't have two separate businesses. They have a single business operated by a husband and wife.

From the instructions for Schedule C (2009):



Sounds like this couple already made the election.

Caution: There are some special rules that can make this affair a lot more complicated if the couple lives in a community property state.

BMK

The post appeared to me to be saying that they were looking for a way that they could do something that would allow them to split the income/expenses in a way more suitable to them...ergo the partnership suggestion.

If they want to maintain the JV election then a good explanation/definition of:
in accordance with your respective interests in the venture.
is what needs to be determined.
Does this mean income/expense is separated by the actual time etc spent individually or could it mean one has more of a respective interest for SE purposes than the other.

My guess is that the first applies.

[Black Bart]

They don't need to establish a partnership. Based on the fact pattern in the original post, they already have a partnership. But they don't have to file a partnership return.

I agree that the allocation of income and expenses should be fact-based, and should not be an arbitrary number invented out of thin air.

They don't have two separate businesses. They have a single business operated by a husband and wife.

From the instructions for Schedule C (2009):

Quote:

Husband-Wife Business

Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C or C-EZ. Instead, file Form 1065. See Pub. 541 for more details.

Exception—Qualified Joint Venture

If you and your spouse each materially participate (see Material participation on page C-3) as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.

Note. Mere joint ownership of property that is not a trade or business does not qualify for the election.

Making the election. To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C, C-EZ, or F. On each line of your separate Schedule C, C-EZ, or F, you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE to pay self-employment tax, as applicable.

If you have employees or otherwise need an employer identification number (EIN) for the business, see www.irs.gov, keyword “qualified joint venture,” for more information.

Once made, the election can be revoked only with the permission of the IRS. However, the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements for filing the election. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture.

Sounds like this couple already made the election.

Caution: There are some special rules that can make this affair a lot more complicated if the couple lives in a community property state.

BMK

Burton -- Thanx very much for this post -- it just happens to be exactly what I needed and was looking for today.

[origun]

I spoke to the clients yesterday in more detail about their business and found out that they both actually sold different things on eBay so I can split up receipts and expenditures more appropriately (not just a strict percentage breakdown) and end up with 2 different Schedule C's that I feel comfortable with. [For example, she has auto expenses but he just buys stuff from China and pays a lot of shipping and the type of items she sells results in less of a markup.] And they are happy...because (coincidentally, not just by fiddling with numbers to get desired result!) the wife ends up with less income than the husband so her SS benefits won't be reduced.
The excerpt from Schedule C that Koss gave helped me get a better handle on it and enabled me to ask better questions and get a better understanding of their work. (I should have looked it up myself but didn't!) I feel I did a much better job than the prior preparer since, with the help of people on this forum, I investigated more fully and asked better questions. Thanks.

[Burke]

If they really want to separate their activities, then I would suggest two different eBay accounts. The IRS could not quibble with that. And it would solve the problem of fooling arround with the numbers to exact a tax (or SS) benefit they would not otherwise be entitled to.