STRUCTURING BUSINESS OPERATIONS BETWEEN SPOUSES

April 2, 2019

Practical Tax Strategies, an excellent tax journal, has just published a very useful article about how to structure business operations between spouses.  The title of the article and its first couple of paragraphs are below:

March, 2019
Business Operations Between Spouses
Copyright (c) 2019 RIA
James R. Hamill
BUSINESS OPERATIONS BETWEEN SPOUSES: PARTNERSHIP FILING OR DISREGARDED ENTITY?

The tax law provides both a statutory and an administrative exception to the requirement to file a partnership return where spouses are the only owners of the business.

*9 Section 6031 requires a partnership to file an annual information return to its members. When spouses operate a business together as the only owners of that business, there would not appear to be a need for a partnership tax filing as an information source because all income or loss is to be reported on the same tax return by way of a joint filing.

The tax law provides both a statutory and an administrative exception to the requirement to file a partnership return where spouses are the only owners of the business. The statutory exception applies only to joint ventures (but not a separate entity) between spouses and also requires that each spouse materially participate in the business of the joint venture and that both spouses elect disregarded entity (DE) treatment. Where spouses are the only owners of an unincorporated business entity and hold their interests as community property under state law, they may choose between partnership or DE status. The community property exception does not require that the operations rise to the level of a trade or business or that either spouse materially participate in the operations. It also applies if the spouses establish a separate entity such as a limited liability company (LLC).

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