To join in on this discussion, you must first log in.

Discussion:Qualified Joint Venture - subtract out spouse portion as Sched C Other Expense?

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> Qualified Joint Venture - subtract out spouse portion as Sched C Other Expense?


WilsonCA (talk|edits) said:

3 August 2012
Anyone have experience with this kind of thing?

Husband began a business in 2010, and reported 100% on his own Sched C. The business was very small at that point, but had a significant ending inventory (about $40k). In 2011, the business grew considerably, and wife quit her job to work full-time for the business, as 50% owner.

My question is, can I start reporting that as a QJV in 2011 by showing all income and expenses (and inventory numbers) on the husband's Sched C, and then just subtract out 1/2 of the net profit on his Sched C and show that amount as gross profit (with no expenses) on the wife's Sched C?

If I can't do that, then do you think I can show a beginning inventory on the wife's schedule C, even though (for her) it's a new business this year?

State is CA, if that matters, which it might...

TaxInfo (talk|edits) said:

3 August 2012
Your question was answered on Tax TV by Ms. Ripperda just recently (qoute):

The community property states, of which there are a handful – there are some special rules when a husband and wife go into business together and form a partnership. Basically what they’re required to do is to actually divide that – the income from the partnership equally and report it separately on separate Schedule C’s. https://www.taxtalktoday.com/programs/071012.cfm

WilsonCA (talk|edits) said:

7 August 2012
Does anyone have any specific experience with either a) a spouse joining the business, such that assets/inventory/etc now have to be split between the 2 spouses, or b) using the method I proposed above for assigning half the the net income/loss to the spouse?

Solomon (talk|edits) said:

8 August 2012
In community property states one Sch C and two SE's based upon material participation percentage of each spouse.

Tax Writer (talk|edits) said:

8 August 2012
I just went to a good seminar at the IRS tax forum on this issue. My professional opinion is that a Form 1065 should ALWAYS be filed, whether or not you are in a community property state. The partnership return is the most correct position. Plus, what happens when they don't agree on an expense? This was the argument of the speaker.

"Husband: We don't need a new computer for the business. Wife: Well, I do the bookkeeping, and I hate the computer we have! I'll just buy it with my money, then!"

What do you do then? What if the participation isn't really 50/50? It never is.

File the 1065. Less audit risk, and more correct. It's a win-win for both parties.

Solomon (talk|edits) said:

8 August 2012
Rev. Proc. 2002-69

One disregarded entity is most acceptable with two SE's based upon material participation of each spouse - of course tax prep fees will be much higher if a partnership is chosen - if that is the motivation.

Tax Writer (talk|edits) said:

8 August 2012
One disregarded entity is most acceptable with two SE's based upon material participation of each spouse

Do they tell you what to do when the spouses separate/divorce/annul their marriage during the year? What if the wife is filing HOH and the husband MFS/Single, etc? Do you want to try and create a partnership from thin air the following year?

The Form 1065 solves that problem.

It's not about the prep fees, it's about correct reporting. If it was a brother and sister, father and son, or an unmarried couple, then it would be a Form 1065. Why treat married couples differently? It seems unprofessional to me, and lazy.

Midtenntax (talk|edits) said:

30 August 2012
What about husband and wife who live in a non-community property state? What are reasons why they would NOT want elect QJV status? I can think of lots of reasons why they would want to elect it, but can't really think of one why they would not.

Ckenefick (talk|edits) said:

30 August 2012
Assuming 50/50, and assuming overall net profit is $200k...if we file to separate Schedule C's, we pay S/E tax on $200k ($100k each spouse). If we file one Schedule C, and pay the non-owning spouse a nominal W2 salary, we avoid quite a bit of FICA...since the owner-spouse would be well over the SS wage base.

Tax Writer (talk|edits) said:

30 August 2012
If we file one Schedule C, and pay the non-owning spouse a nominal W2 salary, we avoid quite a bit of FICA...since the owner-spouse would be well over the SS wage base.

Yes, that's a legitimate tax benefit, Chris, but at 200K, it's really time to incorporate. Plus, if both spouses are working 50/50 in the business, and the wife and husband consider themselves equal partners, what happens when the wife discovers that she isn't really a "partner" and she's just an employee? All of us know that taxpayers rarely understand the semantics of what we do, even when they sign the returns.

As for the "jilted wife?" It happens, and it happens a lot.

I went to a tax seminar where an attorney represented a tax preparer for this very issue-- The business was a restaurant and the husband and wife both busted their butts for years to make it work. The tax preparer filed a single Schedule C (under the husband's SSN). Lo and behold, the wife turns 65 and discovers that she has nothing in her Social Security trust fund-- it was as though she hadn't worked at all for the last 25 years. The SE earnings were all credited to the husband. I don't know if they divorced, or if the wife was just furious about the situation, but... it could have all been avoided by correct reporting. A partnership return would have solved the problem, been more accurate, and avoided a lawsuit.

So no, I don't think that two Schedule C forms to report what is actually a working partnership is ever a good idea.

Ckenefick (talk|edits) said:

30 August 2012
but at 200K, it's really time to incorporate.

Says who? What if client doesn't want to incorporate?

what happens when the wife discovers that she isn't really a "partner" and she's just an employee?

You mean like when she gets her first paycheck? Or do you mean like when she has a conversation with the accountant before receiving her first paycheck?

Lo and behold, the wife turns 65 and discovers that she has nothing in her Social Security trust fund

"Lo and behold" like it's a big surprise. Most people I know would rather save the S/E tax now. And most people I know would rather save the annual cost of not having to prepare a separate entity tax return (or multiple Schedule C's). And most people I know would prefer to deduct their medical expenses on Schedule C along with other employee fringe benefits. Of course, the older one gets, the more they start thinking about Social Security.

So no, I don't think that two Schedule C forms to report what is actually a working partnership is ever a good idea.

That's pretty short-sighted if you ask me. I guess this also means all of your 1-man S-corp's extract 100% of the profits on their W2, with $0 distributions.

Plus, if both spouses are working 50/50 in the business, and the wife and husband consider themselves equal partners,

The QJV rules don't say to allocate things 50/50 in non-community property states. And most husband-wife arrangements don't involve exactly equal work loads, exactly equal decision-making responsibilities and exactly equal duties.

And, if there ever is a divorce, a court doesn't say, "Well, all assets are in the husband's name, so husband gets to keep everything."

Kevinh5 (talk|edits) said:

30 August 2012
Seems like these points should be brought up in a discussion with the clients, who then sign a paper saying they have had this disucssion and at this time, here is what they've chosen to do. Paper goes into your permanent file. (along with your 6th grade teacher's notes of the bad thing you did that one time).

Ckenefick (talk|edits) said:

30 August 2012
Exactly. If we take TaxWriter's approach, we go along for 20-years and one day client says, "Hey, husband and I have paid a lot of S/E tax over the years since you've had us filing two Schedule C's...my friend, who only files a single Schedule C, has been paying a nominal salary to her spouse for 20-years. Why have we been paying all this FICA for all of these years?"

Tax Writer (talk|edits) said:

30 August 2012
Exactly. If we take TaxWriter's approach, we go along for 20-years and one day client says, "Hey, husband and I have paid a lot of S/E tax over the years since you've had us filing t Schedule C's...my friend, who only files a single Schedule C, has been paying a nominal salary to her spouse for 20-years. Why have we been paying all this FICA for all of these years?

The incorporation comment was more of a personal opionion, and no snark was intended or implied.

As for husband and wife businessess, I'm more of a cynic. I'm in CA, and the majority of marriages here (two thirds) end in divorce. I can honestly tell you that I've had at least a dozen clients who have gone through nightmarish divorces when they try to "split" a business. But we can just agree to disagree.

DavidG (talk|edits) said:

30 August 2012
WilsonCA, getting back to your original question, you should NOT subtract out 1/2 of the husbands profit. You should report the husband and wifes share of income and deductions on Schedule C (see the 1065 instructions) based on their ownership percentage.

Tax Writer: you mention "correct reporting". It is perfectly correct to NOT file a 1065 for a QJV. And your restaurant example is not on point. Either the restaurant example took place before QJV was ok (then a 1065 was required and the taxpayer made his own mistake) or they incorrectly prepared a QJC Schedule C by allocating everything to the husband.

DvilleCPA (talk|edits) said:

30 August 2012
We had a couple filing one Schedule F and two Sch SEs. IRS said file 1065 or two Sch Fs.

To join in on this discussion, you must first log in.
Personal tools