Accountants CPA Hartford
William Brighenti, Certified Public Accountant
Certified Business Valuation Analyst
Certified QuickBooks ProAdvisor
Office Address: 46 Mildrum Road, Berlin, Connecticut 06037-2423 Phone: (860) 828-3269 Email: [email protected]
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Married Business Owners No Longer Need to File Partnership Tax Return
Save as much as $1,000+ in accounting fees every year!

Certified Public Accountants typically charge $1,000 or more for Form 1065, U.S. Return of Partnership Income, and the accompanying State informational return every year. The Small Business and Work Opportunity Tax Act of 2007 now allows a "qualified joint venture" to elect not to be treated as a partnership for Federal tax purposes and, thereby, be relieved of filing Form 1065, U.S. Return of Partnership Income every year. Instead of filing a Schedule E to reflect partnership income on Form 1040, husband and wife, as co-owners, each would need to file a separate Schedule C, showing their share of income, gains, losses, and deductions in accordance with their respective ownership interests in the joint venture in order for each of them to receive proper credit for their social security earnings on which retirement benefits are based.

For the business owned by the husband and wife to qualify as "qualified joint venture", it needs to meet all of the following requirements:
  1. the only members of the joint venture are a husband and wife;
  2. the husband and wife must file a joint return;
  3. both spouses must "materially participate" in the business; and
  4. both spouses must elect not to be treated as a partnership.
Businesses in the name of a general or limited partnership or limited liability company are not included: only businesses that are owned and operated by spouses as co-owners, and not as a legally separate state entity. Furthermore, the spouses must share the items of income, gains, losses, deductions, and credits in accordance with each spouse's interest in the business.

The "material participation" requirement is met if and only if each spouse meets one of the following tests:
  1. The taxpayer works 500 hours or more during the year in the activity;
  2. The taxpayer does substantially all the work in the activity;
  3. The taxpayer works more than 100 hours in the activity during the year and no one else works more than the taxpayer;
  4. The activity is a significant participation activity, and the sum of significant participation activities in which the taxpayers works 100-500 hours exceeds 500 hours for the year (significant participation activity is any trade or business activity in which one significantly participates for the taxable year for more than 100 hours during such year, but in which one does not otherwise materially participate);
  5. The taxpayer materially participated in the activity in any 5 of the prior 10 years;
  6. The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years; or
  7. The taxpayer participates in the activity on a regular, continuous, and substantial basis during such year, working at least 100 hours in the activity, with no one else working more hours than the taxpayer in the activity, and no one else receiving compensation for managing the activity.

How can the spouses in a qualified joint venture make the election not to be treated as a partnership for Federal income tax purposes? They simply include with the jointly filed Form 1040 a separate Schedule C for each one's respective share of all items of income, gains, losses, deductions, and credits in accordance with each spouse's ownership interest in the joint venture, and a separate Schedule SE, Self-Employment Tax, for the security security tax allocation. If a partnership return was filed in the preceding tax year, the partnership will be considered terminated by the IRS as of the end of that preceding tax year. No final Form 1065 needs to be filed. In all probability, the spouses will receive a notice from the IRS asking for a Form 1065 for the year of election, in which case, the spouses are advised to call the IRS at the toll-free number on the notice and advise the service representative that they reported the income on their jointly-filed individual income tax return as a qualified joint venture, or to write to the address shown on the notice and provide the same information.

Although once the election is made, it can be revoked only with the permission of the IRS, if the spouses fail to meet the requirements for filing the election for a year, it simply ceases to be in effect. A new election then becomes necessary for any future year in which the spouses desire to be treated as a qualified joint venture as long as they meet its requirements.

Spouses electing qualified joint venture status are treated as a sole proprietor for Federal tax purposes and, consequently, do not require an Employer Identification Number (EIN) for the qualified joint venture.

By electing not to file as a partnership, the taxpayers would replace Federal and State Forms 1065 U.S. Return of Income with just an additional Schedule C and Schedule SE; consequently, the taxpayers should see a significant reduction in their income tax preparation fees from their certified public accountant. If you as a qualified joint venture elect not to file as a partnership and then are not quoted a significantly reduced tax return prepartion fee, please contact Accountants CPA Hartford. We would be happy to do so.

Have a tax or an accounting question? Please feel free to submit it to William Brighenti, Certified Public Accountant, Hartford CPA Accountants. For information and assistance on any tax and accounting issue, please visit our website: Accountants CPA Hartford.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein. The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor .
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