Husband-wife partnerships

From Wikicpa

Husband-wife partnerships

A husband-wife joint venture that is treated as a partnership for federal tax purposes generally must file an annual Form 1065 and issue each spouse a separate Schedule K-1 each year. Of course, this is a tax compliance hardship. (Rev. Proc. 2002-69 provides a special exception for qualifying husband-wife ventures in community property states).

The Small Business and Work Opportunity Tax Act of 2007 allows some husband-wife ventures to “elect out” of the partnership rules for federal tax purposes. To be eligible, the spouses must file jointly, and the husband-wife operation must be a qualified joint venture, which means a trade or business operation where they meet the following rules:

• the husband and wife are the only members of the venture,

• both spouses materially participate in the trade or business,

• both spouses agree to elect out of the partnership tax rules.

After electing out, each spouse must report his or her share of the federal income tax items from the venture on the appropriate IRS form (e.g., on a separate Schedule C for each spouse). Similarly, each spouse must report his or her share of net self-employment income from the venture on a separate Schedule SE (each spouse will receive credit for that SE income for Social Security benefit eligibility purposes).

Timing

The new elect out option is available for tax years beginning after 12/31/06. [See IRC Sees. 761(f) and 1402(a)(17)j]

Electing out won’t change a married couple’s total federal income tax Liability or total SE tax liability, it will eliminate the need to prepare and file Form 1065 and the related Schedules K-1.