Husband & Wife owned business

[DaveinTexas]

Husband and wife solely own their unincorporated business. Can anyone point me in the direction of the election form/template that must be completed to make this election?

Also another question: Does the wife, even though both participate, report the business income as a sole proprietor and pay the husband a salary for his services?

TIA.

[fliszt]

How much

time does husband & wife spend actually working in the business. I don't have this year tax book yet, but look at 5-7 last year TB. "According to IRS instructions for Schedule C, if a husband and wife operate a jointly owned business and share in profits and losees, they should file form 1065 as a partnership, not schedule C."
Larry

[solomon]

Husband and wife solely own their unincorporated business. Can anyone point me in the direction of the election form/template that must be completed to make this election?

Also another question: Does the wife, even though both participate, report the business income as a sole proprietor and pay the husband a salary for his services?

TIA.

Starting in 2007, if there is material participation by both, two Sch C's may be filed splitting the income and expenses based upon each of their interests. Nevertheless, since Texas is CP I am not sure but that only one C is necessary splitting the profit to two SE's.

[DaveinTexas]

This is what I think

Starting in 2007, if there is material participation by both, two Sch C's may be filed splitting the income and expenses based upon each of their interests. Nevertheless, since Texas is CP I am not sure but that only one C is necessary splitting the profit to two SE's.

I agree with one schedule c and splitting the schedule se. It produces the same result.

I don't think that the wife has much to do with the business, to be honest.

[fliszt]

Dave, in addition

to what I previously posted, the IRS says if TP and spouse wholly own an un-incorporated business as community property in a community property state, then the business may be treated as a sole propietor or partnership.

[DaveinTexas]

Great

to what I previously posted, the IRS says if TP and spouse wholly own an un-incorporated business as community property in a community property state, then the business may be treated as a sole propietor or partnership.

So now they have even more options.

Another preparer prepared their tax return last year and filed one schedule C with both of their names on the form and then prepared two schedule SEs. I know that this is considered improper, but the results are the same as long as the ownership is 50/50.

Must I prepare their return this year in the same manner, or can I choose to file the return with one schedule C with the husband as the sole proprietor? This will end up saving them over $10,000 in SE tax; large profit this year.

I can't find anything in the IRS or any regulations that state how you make the election and if the tax treatment of the business can change every year. Obviously, if you decide to be taxed as a partnership you can't then decide to be taxed as a sole prop the next year. But what is stopping a married couple from saying that the business is owned equally one year and sole owned by one spouse the next?

TIA.

[Bees Knees]

From TTB, page 5-7:

Husband and wife business — 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 joint venture is qualified if:
1) The only members of the joint venture are husband and wife,
2) Both spouses materially participate in the trade or business,
and
3) 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. Thus each spouse would account for his or
her respective share on Schedule C of Form 1040. 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
consideration and is separately reported on the corresponding
Schedule SE of Form 1040.

Note that two Schedule C's must be filed. Also note there is no rule that it be 50/50.

As to the election, the election is made by simply doing it. No statement is required to be attached.

[outwest]

And as to how to allocate the income...

read code section 1402(a)(5)

it's a fact and circumstances issue, but you can't be making arbitrary allocations.

BTW, note that this was put in for our community property states.... I'm in Idaho.

[Bees Knees]

BTW, note that this was put in for our community property states.... I'm in Idaho.

The new law applies to all states. Not just community property states.

[outwest]

should have said..

"orignally put in for community property states". I meant that comment as a interesting historical sidebar not a limitation of applicability.

[joanmcq]

And in community property states, if the biz is community (both work it) we've filed ONE Sch C, and two SEs, with each getting half the income allocated. The new regs deal with non community property states. And note the 'material participation' requirement for it to be a qualified joint venture.

[LindaK]

How to Handle Depreciation

From TTB, page 5-7:

Note that two Schedule C's must be filed. Also note there is no rule that it be 50/50.

As to the election, the election is made by simply doing it. No statement is required to be attached.

It is fairly easy to divide other income/expenses between H/W, any thoughts on how to do depreciation? It's a pain to enter all assets into software for the spouse. Can we list all depr items under H and use a misc. line on Sch C or F to reduce depr on H's copy and add as expense on W's copy?

[Bees Knees]

It is fairly easy to divide other income/expenses between H/W, any thoughts on how to do depreciation? It's a pain to enter all assets into software for the spouse. Can we list all depr items under H and use a misc. line on Sch C or F to reduce depr on H's copy and add as expense on W's copy?

If you are asking for my approval, I don't have the authority to give it to you. If you are asking whether the IRS instructions say you can do it, the answer is no.

Schedule C instructions say the following:

Exception—Qualified joint venture. If
you and your spouse materially participate
(see Material participation beginning on
page C-2) 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 taxed as a qualified
joint venture instead of a partnership. To
make this election, you must divide all
items of income, gain, loss, deduction, and
credit between you and your spouse in accordance
with your respective interests in
the venture. Each of you must file a separate
Schedule C or C-EZ. On each line of
your separate Schedule C or C-EZ, you
must enter your share of the applicable income,
deduction, or loss.

Note that it says each Schedule C must have all lines filled out. This would include the depreciation calculation.

[joanmcq]

So now they have even more options.

Another preparer prepared their tax return last year and filed one schedule C with both of their names on the form and then prepared two schedule SEs. I know that this is considered improper, but the results are the same as long as the ownership is 50/50.

TIA.

Just wanted to point out that last year and this year in Texas, this was entirely proper for a joint business in a community property state. Also, saving a lot of SE tax may not be in the best interests of the wife (if the biz is a joint venture) since it is her social security account that is being shorted. May not be a big deal if they have been married a long time and don't divorce, but it could considerably short her in the future.

[Fuzzy Faced Leader]

Several things not covered. First, if the business is a rental partnership, it will turn non-SE taxed business to SE taxed business. Second, the two schedule C's have to be filed based on the participation of each person. The IRS has not yet addressed the complexities involved in depreciation. Thus, in the interim, any reasonable approach could work. For instance, If the business assets are only used by one person, that person could claim the depreciation. You can't split the time used for each asset to the person using it, since this could result in reduced depreciation. Third, this is an election. A partnership return can still be filed.