Partnership owned by Spouses

[jrjames]

I know that a partnerhsip that is owned by a husband ad wife can file as a sole proprietor.

This seems to have several advantages including no balance sheet or basis caculations as well as the ability of home office deduction and a better way to deduct business mileage. Does anyone know any disadvantages. Particularly if filing as a sole proprietor is it required to file two schedule C's or just two SE's?

[mcb39]

As of this year, it is necessary to file two Schedule Cs. The software will not even allow you to split the SE. However, I still found it advantageous to do it that way. I have several of these and in many cases, the spouses who are actively involved in the business want to pay into SE. Also, in WI, we have a married couple credit. If I split the income, they get the WI credit which is usually around $400. It is a little more work, but I still don't think it justifies preparing a 1065 and having to charge good clients for the extra work that isn't really necessary...IMO

[jainen]

>>a partnership that is owned by a husband and wife can file as a sole proprietor<<

This is not necessarily true. It only applies in community property states or when the spouses are conducting a qualified joint venture and meet other requirements.

[mcb39]

>>a partnership that is owned by a husband and wife can file as a sole proprietor<<

This is not necessarily true. It only applies in community property states or when the spouses are conducting a qualified joint venture and meet other requirements.

Jainen, you are correct and WI is a community property state. I guess I just assumed that by now everyone should know about that distinction. The lesson here is to "assume" nothing. I am so glad that you are contributing again.

[michaelmars]

LETS get back to the original question. i would always do the 1065. high sch c filers are at the greatest risk of audit and i want the income to be a flow in and not reported on the personal returns. also if applying for credit i'd rather just give the entities tax returns than give personal ones. any lawsuits down the road would mostlikely have to go through the partnership first and again sort of shelter the personal returns. if you set it up as an llc then each spouse is protected against the other ones actions. [very general rule]. from an estate planning or even business planing posiitions a partnership can easily be passed to kids or allow new partners to enter, if a sch c them you would have to convert at that time, much easier to convert in the very beginning. i have many who owned peoperty in a SMLLC and i had them give 1% or so to a spouse and/or kids just to make the partnership from the onset. and of course with the high rate of divorses, this might come in handy. and lets not forget the most important reason, another return another fee for us!

[kcjenkins]

I agree with Michael, there are lots of good reasons to file the 1065, besides [maybe] more income for you. While you may or may not charge more for the LLC's 1065 than you would charge for the two C's. it does tend to reduce the audit risk, since fewer 1065s are selected than Cs. And it is good for estate planning reasons, has some liability protection, etc. It's never an absolute, but it is often a wise choice for both the clients and the professional.