Under the act a married couple that files jointly, and operates an unincorporated business can know file 2 schedule C's beginning after 12/31/2006. No more 1065's and K-1's
See act for the finer points.
See act for the finer points.
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I believe
there has to be material participation on each of their parts and this is in non-community property states. Currently in CP states a husband/wife partnership can file one Sch C with one name on it. -
Schedule C for Husband-Wife partnership
People have been doing this for years. A program I had several years ago automatically split it into two Schedule Cs if you entered "Joint" rather than identify it to one spouse.Comment
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Mmmmmmmmmmmmmm
Wonder why they included such a common practice into law????
As for one Sch. C in a CP State,,,,that produces only one SE tax, now you can split net income and both get Social Security donations.Confucius say:
He who sits on tack is better off.Comment
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Splitting SE Tax
RL is correct in a CP state. My software does split it by selecting Joint on Sch C but it creates two SE's only - not two Sch C's because in CP state only one Sch C is filed.Comment
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It was common practice, but the treatment was not correct under the existing law. The usual sequence is that Congress makes a law, then people follow it. In this case, the law followed what people were doing. In a sense, the new law decriminalized filing Schedule C for husband-wife partnerships.Originally posted by RLymanC View Post
I still believe that if the amounts are material, a partnership return should be filed.Comment
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A good example of why you should not trust your software to interpret the tax law for you.Originally posted by Joe Btfsplk View Post
Software companies did that because practitioners wanted them to do that; not because the law said they could.Comment
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no, software companies included it because it is legal in CP states. and it will produce two Schedule SEs. People in non CP states simply were filing incorrectly.Comment
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Not true. Software companies were doing that long before Rev. Proc. 2002-69 said CP states could do it.Originally posted by joanmcq View PostComment
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This is a pet peeve
As Bees stated, while tax software is wonderful, don't necessarily rely on the correctness of complying with the tax code/laws. That is something that our clients rely on us to try to interpret and implement as we complete their returns.
If you look at the SE instructions for a CP state it clearly states that in a CP state you can not split the SE income. http://www.irs.gov/pub/irs-pdf/i1040sse.pdf
SE instructions for 2006, on page 2, under community property, clearly state that the SE is attached to the "spouse" that is carrying on the business. Also read under "partnership income/loss" So it seems you can not file one Schedule C and split the SE 50/50 between both spouses. You would need to file a form 1065 if each spouse would like the credit for SE tax.
Here is an excerpt from an article that I found relating to CP statesSo it would seem in the Community Property States, two options, honestly employ the other spouse and pay the FICA/Mcare through payroll for their credits, or file a Partnership return in whatever percentage 50/50, 60/40, etc for each of the spouses to obtain their SE credits.For income tax purposes, community property rules generally require an equal allocation of income earned by spouses regardless of who actually earned it.
However, for self-employment (SE) tax purposes, the IRS maintains that the spouse conducting the trade or business is solely liable for SE tax on 100% of the trade or business net income.
IRC Sec. 1402(a)(5)(A) states that if any income derived from a trade or business is community income (under the community property laws applicable to that state), all of the gross income and deductions attributable to such trade or business shall be treated as gross income and deductions of the husband (Landsberg). This is the rule unless the wife exercises substantially all of the management and control of the trade or business, in which case all of the gross income and deductions are allocated to her for SE tax purposes (Charlton).
Note: In Rev. Rul. 82-39, the IRS stated that despite IRC Sec. 1402(a)(5), it will follow the noncommunity property rule in community property states, holding that, absent a partnership, only the spouse carrying on the trade or business activity will be subject to the SE tax. The Schedule SE instructions provide similar guidance. As a practical matter, however, a spouse in a community property state who carries on a trade or business probably exercises sufficient management and control over the business to be subject to SE tax under IRC Sec. 1402(a)(5)(A), which makes the IRS stance less contradictory.
The rules for reporting trade or business income derived from community property income do not apply if one spouse is an employee of the other spouse???s sole proprietorship (Ltr. Rul. 8742007). In this case, wages paid by the proprietor to the employee-spouse are subject to W-2 and FICA reporting, as discussed in Key Issue 8C.
"Executive Summary":
The Internal Revenue Code states that SE income will be allocated to the husband, when spouses both work the business.
However, the IRS allows one or the other spouse to report the income, based on who is actually conducting the business.
For Federal income tax, both spouses are liable even in community property states. (Recourse: Innocent Spouse)
But for SE tax, the spouse who operates the business is solely liable.
If you want to better delineate the relationships, one way is to let the managing spouse report on Schedule C, and put the other spouse on the payroll. Or, select another form of business.
We have had many discussions on this topic on this board!
SandyComment
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Two Operators
S T, the line of thinking presented in your excerpt and message assumes that there is only one spouse operating the proprietorship.
Sometimes Mom is the only one running the Mom & Pop store, other times Pop is running it. Occasionally they are both there. According to the excerpt, a preparer would be forced to select one spouse. Not realistic.
Allowing the spouses to split the earnings and SE credit would be appropriate for Mom and Pop, but would allow for abuse in situations where one spouse is not involved in the operation.
Does the new law allow for a split even if one spouse is not active?Comment
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Originally posted by Corduroy Frog View Post
The new law says both have to materially participate. If one doesn't, then the new law that allows you to elect out of partnership treatment does not apply.Comment
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These instructions refer to how to split community income where one spouse is running the business. In this case income is split but SE is correctly apportioned to the one running the business. The joint schedule C with two SEs is used ONLY where both spouses are running the business in a community property state. In community property states, you were and are allowed to do this, and not file as a partnership to get joint SE treatment.Originally posted by
If you look at the SE instructions for a CP state it clearly states that in a CP state you can not split the SE income. [urlComment
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Agree with Joanmcg
From Sec. 1402(a)(5) - Regarding CP
"... if such trade or
business is jointly operated, treated as the gross income and deductions
of each spouse on the basis of their respective distributive share of
the gross income and deductions;..."
Which would require one C and two SE's based on distributive share.Comment
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Worked pretty good though. The correct tax was paid without the necessity of filing a partnership return. Often it doesn't matter what the law says if you get the proper results. The IRS does NOT fine you for paying the right tax on the wrong form. Why should they waste their time?Originally posted by Bees Knees View PostComment
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