Partnership?

[skhyatt]

Going to see a prospective client this Saturday. In talking to him on the phone, he first said he was a partnership, then told me it was just him and his wife as the only partners. I told him that a sole prop. can consist of a husband/wife and was there ever any partnership papers drawn up and he said no. Said it was just the way the previous tax preparer did the returns. My question is if it really is a sole prop and not a partnership, can I just file it as a sole prop. for 2006 even though wasn't filed that way in the past or is there something else I need to do? In addition to that, he tells me there has been no bookkeeping kept up for most all of 2006, no 941's, no sales tax reports, etc. Sounds like fun. I'll have to see what I'm faced with before deciding if I want to take on this one. Feedback much appreciated.

[Oxtrainer]

Partnership

I can't speak for Ca but here in NC and I believe it to be in all states. Two people
engaging in abusiness are a partnership even being huband and wife. A partnership
may be written or verbal and a verbal partnership can be binding. In Fact a person
must be careful that he does not enter into apartnership unwittingly.

[solomon]

Cp

If a community property state, then Sch C can be filed. One of the provisions Congress is working in the Small Business Act is to allow in all states a married couple to file Sch C rather than a 1065. Hopefully, that will pass in 2007.

[S T]

H/W partnership

See if you can find out their status on the DBA filings, you should be able to pull up online and check. Ask them how their bank account is held, as a sole proprietor or as a partnership.

If they are acting as a partnership, then they should file as a partnership, then each one of them will receive the social security credits.

If you file as a Schedule C, only one of them will receive the social security credits.

Their are some lengthy discussions that we have had on the TTB about this. See this link for starters http://www.thetaxbook.com/forums/sho...e+partnerships

[JG EA]

If you file as a Schedule C, only one of them will receive the social security credits.

You can make the Schedule C Joint, first name on the return will appear, and have two SE's 50% & 50%.

[S T]

I dont think so

Look at the SE info on community property and husband/wife operating http://www.irs.gov/pub/irs-pdf/i1040sse.pdf

From Pub 334

Community Property Income
If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business

See the prior discussion link posted on TTB, Armando and Bees. I am going to side with Armando. If husband and wife act as a partnership, return needs to be filed as a partnership, otherwise only the primary party will file the Schedule C and receive the SS credits.

I don't see how we can opt out by filing 2 schedule C forms according to the instructions.

I also had a divorce issue arise in California last year that addressed this very issue. The ex-spouse was very upset that she did not receive any SS credits (for the 8 years she worked in the business) and was claiming for additional settlements. The divorce attorney stated that because a 1065 form or 1120 S form had not been filed, she was not entitled. The husband's attorney on that issue prevailed as he was operating the business even though the ex-wife also worked in the business and they refused to file as a partnership (business license, DBA, and tax returns). So the husband did not have to pay the ex-spouse for any loss on the SS credits. Altho he paid dearly on the community property of the business and other community issues.

Sandy

[JG EA]

Sandy,

My software even does this automatically if you put in joint instead of T or S. And if it truly is a 50%/50% Sch C activity, why shouldn't they both get the SS. Actually in a case or two they paid more SE tax this way instead of one reaching the limit, but they thought the benefit should go to both since both worked. Of course this shows a great respect for the system and there will actually be SS benefits when they retire.

[S T]

I know software will split

But that doesn't make it right.

Between the SE rules above and what is in the Schedule C instructions

As stated in the IRS 1040 Instructions for Schedule C:

"If you and your spouse jointly own and operate a 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 Scheudle C or C-EZ. Instead, file Form 1065. See Pub. 541 for more details."

it would seem a 1065 would need to be filed and each partner receives their SE tax.

Sandy

[Oxtrainer]

Partnership

Sandy is absoloutly right, it is taught that way in the Tax Course, In the Federal bulletins
and In a small business course at the college by a teacher working in conjuntion with
the IRS. A strong warning about verbal agreements that you can get into without even
realizing it. I really can't understand all the argument but I am not a lawyer and don't
intend to pretend to be one. A husband and wife working together and sharing the
profits ARE a partnership.

[outwest]

Ah but...

in rev proc 2002-69 in relation to LLCs

301.7701-2.
SECTION 4. APPLICATION
.01 If a qualified entity (as described in section 3.02 of this revenue procedure),
and the husband and wife as community property owners, treat the entity as a
disregarded entity for federal tax purposes, the Internal Revenue Service will accept the
position that the entity is a disregarded entity for federal tax purposes.
.02 If a qualified entity (as described in section 3.02 of this revenue procedure),
and the husband and wife as community property owners, treat the entity as a
partnership for federal tax purposes and file the appropriate partnership returns, the
Internal Revenue Service will accept the position that the entity is a partnership for
federal tax purposes.

Nice to have check the box rules for h/w LLC in community property states.

[skhyatt]

Thanks for all the replies. TTB, 5-7 says H&W in community property state can do either, sch C or 1065. Not much experience here with 1065's. What would be advantage of filing as a Partnership in addition to what has been discussed here?

[jainen]

advantage of filing

>>What would be advantage of filing as a Partnership in addition to what has been discussed here?<<

A partnership allows them to formalize their agreement, including perhaps something other than a 50/50 split. There can be issues for estate planning and other transfers of the partnership interests. Also, they may have vendors or consultants who insist on working with an entity rather than an individual.

[skhyatt]

Saw prospect today. Books were not that bad. They have filed as a partnership the last two years. But, they filed everything under another business name. For 2006, they started using a different name. 2006 is the year that nothing has been filed or paid. No quarterly reports, no annual reports and nothing paid. Small payroll, but W-2's not sent out. I can take care of completing the various reports and filing them and he knows there will be penalties. The thing I'm wondering about is the name change. Owner says he was able to change the name and keep the same tax id number, but I didn't see anything with the new name on it, except the EDD report for the State of Calif. Am I wrong or won't he have to "close" the old business and "start" the new one? He is using the same equipment, etc in the new business name.

[S T]

Calif

If you are in Calif, EDD really likes to keep the same EDD TIN# even if new ownership , however, I have found that if there is a change in ownership and name, IRS wants a new TIN#.

I had a sole proprietor that EDD kept the same number when changed to a S Corp, but Fed's wanted a new #.

So I would guess your first step is to check out the Fed # and whether or not they applied for a new # from the old partnership and/or check with Fed to see if they want a new TIN#.

Sandy