AccountingSmall BusinessTaxes

Husband and wife partnerships are complicated

I’m talking taxes here, not relationship advice. I’m the last person who should be giving advice on marital relationships. Unfortunately, I might not be much help on the tax and legal issues either. The best I hope to accomplish in this blog post is to list some of the issues, in bullet format, that should be considered:

  • Partnerships arise sometimes even this result was unintended.
  • Partnerships require no written  formation or operating agreement.
  • A Limited Liability Company formed by more than one person gives rise to a partnership for federal tax purposes. This is the default result if another election is filed.
  • An LLC with more than one shareholder can elect to be treated as a partnership or as an S corporation for tax purposes. This filing must be made on a timely basis and is not allowed retroactively.
  • Partnerships may offer greater tax planning flexibility than S corporations through “special allocations” but that benefit is usually negated when the partners are husband and wife filing taxes jointly.
  • A lack of appropriate written agreements is a root cause of many business disputes, particularly in the area of partnerships.
  • IRS refers to state law in some partnership and LLC issues.
  • State law may require filings by partnerships.
  • Both federal tax law and state law refer to partnership documents that may or may not exist.
  • Where you live matters. Community property states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) have different rules for husband and wife partnerships than in other states.
  • IRS publications have known conflicts in advice, although the most recent advice (2017) on this topic is clear.
  • Taxpayers are not entitled to rely on IRS publications or advice as authority on any position.
  • A special provision called a “qualified joint venture” may provide some relief on the complexities of partnership tax accounting for husband and wife partnerships in community property states.
  • Partnerships require tax accounting procedures that are more complicated than single owner unincorporated businesses.
  • Unreimbursed partnership expenses including personal use of auto and home office expense can be problematic for taxpayers.

The point of this post is simply to indicate that that husband and wife partnerships can be a complex issue; perhaps more complex than the benefits of this type of business organization.

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