H/W Partnership to Sch C

[Deborah]

Client is LLC, husband and wife, filing a partnership return. They just got assessed a $500 penalty for filing 2004 late (which will be protested of course) but they are still several years behind. They hate paperwork. Anyway, it seems that one way to get around the future penalties would be to file Sch C instead of 1065 now that the IRS has officially said it is okay. But I am unsure how to make the transition.

On the original SS-4 we checked "partnership" which was the default election for a husband and wife - no further entity classification was made. Form 8832 does not offer an option that fits this scenario.

I believe the 1st year this it is "legal" for a husband and wife to file a joint Sch C is 2007 - but I don't know how to make the transition other than marking the 1065 final and then just continuing on with a Sch C.

It would be a really good move to start filing the Sch C in lieu of 1065 in 2005. and I know the IRS does not object if the proper cover letter is sent with the tax return - would that work to start the Sch C in 2005. The business show a loss always - .
Thanks.

[Bees Knees]

Rev. Proc. 84-35 is the Revenue Procedure you use to abate the penalty. It says: “The penalty [for not filing Form 1065) will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership ....”

It is important, however, that the partners actually filed the 1040 and reported the partnership income, even though the partnership did not file the 1065 on time. If the 1040 has been late all these years, you cannot abate the $500 penalty for filing the 1065 late all these years.

TheTaxBook updates page has this information posted concerning electing to file Schedule C rather than 1065 in 2007:

New Law. Beginning in 2007, a qualified joint venture whose only members are a husband and wife may elect not to be treated as a partnership for federal tax purposes. A qualified joint venture is one where:
• The only members of the joint venture are a husband and wife,
• Both spouses materially participate in the trade or business, and
• Both spouses elect to have the provision apply.
All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, each spouse would account for his or her respective share on the appropriate form (such as Schedule C). The new law is not intended to change the determination under present law of whether an entity is a partnership for Federal tax purposes (without regard to this election).
For purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes (i.e., in accordance with their respective interests in the venture). A corresponding change is made to the definition of net earnings from self-employment under the Social Security Act. The new law is not intended to prevent allocations or reallocations, to the extent permitted under present law, by courts or by the Social Security Administration of net earnings from self-employment for purposes of determining Social Security benefits of an individual.

You will note that it is an election not to be treated as a partnership for federal tax purposes. That means an existing partnership (whether or not a 1065 has been filed) can elect starting in 2007 to no longer be a partnership provided all the other rules are met.

As to how to make the election, the 1040 and Schedule C instructions are not published yet, and the draft Schedule C for 2007 that was released last June does not contain any indication of how to make the election.

[Joe Btfsplk]

Opting out of partnership treatment

See page 20-3 of the Tax Book. Partners can elect to opt out following the procedures described.

[Deborah]

Missing those pages

My 2006 Tax Book goes from page 20-2 to 20-5. Is there any way you could send or post the missing pages 20-3 and 20-4. Email dlemel@dlemel.net fax 877-570-9408. Thanks.

[Deborah]

Opt out doesn't work

The opt out provision does not apply. This partnership is a husband/wife restaurant - opt out can't be used for an active business. But thanks anyway - it was a good idea.