Husband/wife Sch C

[MargaretMort]

I think I am over-working my brain too hard on this one. Wife has a small business, has had employees in the past, has cut back and no longer has any employees. She took Social Security at 62. Husband has always helped some in the business but had his own job. He took Social Security at 65. She is now concerned that if she makes more than the $14000+ allowed she will lost her SS to make up the overage and asked if she can show him as part owner and split the income in order to keep her under the threshold. He truly does a lot more work with her and I don't have a problem with it. Just am not positive I am thinking correctly.

Truly do appreciate all thoughts and comments. MM

[mcb39]

In a Community Property State, it is a "given". In other states, if he truly does a lot of the work, it is not a problem. It is just a nuisance for us as the software no longer allows us to just "check the box" to split the income and expenses. You have to do it manually. I had a few of these for 2008 and don't expect it to change for 2009. Good Luck!

[taxit]

Why not just make him an employee. You get the same results without the question of his ownership in the business.

[mcb39]

Making him an employee involves withholding, Unemployment, Workmans Comp, etc. She would be better off to make him a partner and file a 1065 (Not that I recomment that route). Margaret is thinking correctly IMO....split the income.

[MargaretMort]

Yes, we don't want to get into employee taxes again. Florida isn't a community property state so that doesn't apply. I assume I would have to do 2 Sch. C.s and split all the expenses down the middle?

Oh, and there is no reason to become a partnership, don't think that would be an advantage for the amount of money we are talking about.

Thanks for the input. MM

[michaelmars]

there are advantages to a 1065 and Marilyn is right. it gets the info off of the personal return which is key. irs audits sch c the most and having 2 sch c's with the same numbers looks suspicious to me and remember the irs says if you have a partnership, even a defacto one, you should file a partnership return. the only real cost involved would me the accounting fees

[MontanaEA]

From the IRS Website:

Election for Husband and Wife Unincorporated Businesses

An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

Reasons why a Husband and Wife might want to make the election not to be treated as a partnership

Because a business jointly owned and operated by a married couple is generally treated as a partnership for Federal tax purposes, the spouses must comply with filing and record keeping requirements imposed on partnerships and their partners. Married co-owners failing to file properly as a partnership may have been reporting on a Schedule C in the name of one spouse, so that only one spouse received credit for social security and Medicare coverage purposes. The election permits certain married co-owners to avoid filing partnership returns, provided that each spouse separately reports a share of all of the businesses’ items of income, gain, loss, deduction, and credit. Under the election, both spouses will receive credit for social security and Medicare coverage purposes.

Definition of a qualified joint venture

A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a husband and wife who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a general or limited partnership or limited liability company) (See below). Note also that mere joint ownership of property that is not a trade or business does not qualify for the election. The spouses must share the items of income, gain, loss, deduction, and credit in accordance with each spouse's interest in the business. The meaning of “material participation” is the same as under the passive activity loss rules in section 469(h) and the corresponding regulations (see Publication 925, Passive Activity and At-Risk Rules). Note that, except as provided in section 469©(7), rental real estate income or loss generally is passive under section 469, even if the material participation rules are satisfied, and filing as a qualified joint venture will not alter the character of passive income or loss.

How to make the election to be treated as a qualified joint venture

Spouses make the election on a jointly filed Form 1040 (PDF) by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) (PDF) or Schedule F (Form 1040), Profit of Loss From Farming (PDF), and, if otherwise required, a separate Schedule SE (Form 1040), Self-Employment Tax (PDF). For example, to make the election for 2008, jointly file your 2008 Form 1040, with the required schedules (see below). The partnership terminates at the end of the taxable year immediately preceding the year the election takes effect. For information on how to report the business for the taxable year before the election is made, see Publication 541 on Partnerships and terminations.

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

How to report Federal income tax as a qualified joint venture (including self-employment tax)

Spouses electing qualified joint venture status are treated as sole proprietors for Federal tax purposes. The spouses must share the businesses’ items of income, gain, loss, deduction, and credit. Therefore, the spouses must take into account the items in accordance with each spouse's interest in the business. The same allocation will apply for calculating self-employment tax if applicable, and may affect each spouse’s social security benefits. Each spouse must file a separate Schedule C (or Schedule F) to report profits and losses and, if otherwise required, a separate Schedule SE to report self-employment tax for each spouse. Spouses with a rental real estate business not otherwise subject to self-employment tax should enter "Exempt--QJV" on their Form 1040, line 58, and should not file Schedules SE, unless either or both spouses have other income subject to self-employment tax. If there are other net earnings from self-employment of $400 or more, the spouse(s) with the other net earnings from self-employment should file Schedule SE and enter "Exempt---QJV" and the amount of the net profit from the rental real estate business from Schedule C (or Schedule F) on the dotted line to the left of Schedule SE, line 3 (but not on Form 1040, line 58). Subtract that amount from the total of lines 1 and 2 and enter the result on line 3. Use the amount on line 3 to calculate self-employment tax that will be reported on Form 1040, line 58.

In general, spouses do NOT need an Employer Identification Number (EIN) for the qualified joint venture

Spouses electing qualified joint venture status are treated as sole proprietors for Federal tax purposes. Using the rules for sole proprietors, an EIN is not required for a sole proprietorship unless the sole proprietorship is required to file excise, employment, alcohol, tobacco, or firearms returns. If an EIN is required, the filing spouse should complete a Form SS-4 and request an EIN as a sole proprietor.

What to do if the spouses already have an EIN for the partnership

One spouse cannot continue to use that EIN for the qualified joint venture. The EIN must remain with the partnership (and be used by the partnership for any year in which the requirements of a qualified joint venture are not met). If you need EINs for the sole proprietorships, see above on EINs for sole proprietors.

How to handle requests from the IRS for a partnership return from the spouses for tax years for which the election is in effect

Once the election is made, if the spouses receive a notice from the IRS asking for a Form 1065 (PDF) for a year in which the spouses meet the requirements of a qualified joint venture, the spouses should contact the toll-free number that is shown on the notice and advise the telephone assistor that they reported the income on their jointly-filed individual income tax return as a qualified joint venture. Alternatively, the spouses can write to the address shown on the notice and provide the same information.

If the spouses elect to be treated as a qualified joint venture, how do they report and pay Federal employment taxes?

If the business has employees, either of the sole proprietor spouses may report and pay the employment taxes due on wages paid to the employees, using the EIN of that spouse’s sole proprietorship. If the business already filed Forms 941 or deposited or paid taxes for part of the year under the partnership's EIN, the spouse may be considered the “successor employer” of the employee for purposes of determining whether the wages have reached the social security and Federal unemployment wage base limits. See Publication 15 for more information on the successor employer rules. See above regarding the allocation of the deductions for income tax purposes.

Duration that the election remains in effect

Once the election is made, it 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.

References/Related Topics

* Husband and Wife Business

* Partnerships

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

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Page Last Reviewed or Updated: April 03, 2009

[MargaretMort]

Wow, Montana! My sincere thanks. This information fills the bill and makes me feel a lot more comfortable with what I wanted to do in the first place. Whew!!!!! I knew the information was out there somewhere, just didn't look in the correct places.

The people on this web site are truly awesome and so willing to help one another. Again, THANK YOU.

MM

[michaelmars]

Be carefull, just because its allowed it doesn't mean its the best for the client. Example, real estate can be a sch e but everyone will tell you to put it into a llc for so many good reasons. Also what about state and local taxes? You have to consider the local effect too.

[mcb39]

I don't believe that Fl has State Income tax. Even so, Margaret, keep it simple if it is as small a business as you indicate. I understand wherein lies your dilemma (The matter of not paying back SS). You can split the income and expenses as you see fit. It doesn't have to be 50/50, though that is sometimes easier when doing the calculations. Make the split as honest as you can. If he truly does half of the work, etc. I have never had the IRS question one of these, but WI is Community Property so that might make a difference. I am sure that you have carefully read the cite posted by Montana EA. The answers are all there. Follow your original instinct. You were on the right track all along. IMO

[MargaretMort]

Again, my thanks for everyone's willingness to share their insight with me. This is a very small business and I am now comfortable with what I plan to do. I will definitely go to the IRS web site and down load the pertinent info for my records. MM