May 062011

Cup of Joe

Our first after tax season breather so top off that Cup of Joe and read this one!  Warning…it is a little technical but savvy…

Tax law generally applies at the individual level.  For example, married couples can file joint tax returns or separately but both social security numbers are required regardless.  BTW, your social security number/card is used to identify you even though it says “Not for Identification Purposes” on its face.  Stop laughing, it’s true.  There are other aspects of this tax applications at the individual level throughout the Internal Revenue Code such as innocent spouse relief provisions etc… but most of that stuff is rather boring so just trust us.

Catch this aspect which is not so boring and can prove very valuable for your tax planning:  More specifically, jointly owned businesses by a husband and wife are generally classified as a partnership for tax purposes: small/article/0,,id=177376,00.html

The married couple would have to make a special election to be treated as a “qualified joint venture” to avoid partnership status.  The IRS makes it very clear that social security is the added aspect to individual taxation with this provision.  The IRS thinks that people trust the social security system labeled “entitlements” these days.  The interesting issue is that the IRS does not allow a limited partnership to be treated as a “qualified joint venture”.  POW, the tax planning strategy is right there on IRS websites for the entire world to see!!!  Do you see it?  Maybe not because the IRS went to a lot of trouble to NOT explain

(i.e. HIDE) why you would want to be treated as a “limited partnership”.

That is where great CPA firms step up to the plate to knock it out of the park at the beginning of base ball season.  If you and your spouse operate a business together, a “sole proprietorship” or a “single member LLC” and have not made the election to be treated as a “qualified joint venture”, consider the following:

Many businesses are operated by one spouse but funded directly or indirectly by both.

A limited partnership in general is where one partner does all the work and other people simply fund it, same as the bullet above.  (No, we are not talking about a marriage partnership but a business)

Limited partners are not subjected to social security tax, general partners are.

The IRS does not publish this fact on its website but why? Read the example below!

Eample:  Let’s say a couple opens a photography studio which becomes an amazing business netting $100,000 annually.  Joint moneys are used to open the business sharing profits 50/50 but only one spouse works it.  Let’s ignore income taxes and assume that only social security taxes apply to this income at the new rate of 13.3%.  So, the couple would owe $13,300 in social security tax on this income (ignoring some very technical guaranteed payment issues).  The couple decides to use CFO Bridge LLC for their tax advisers.  Instantly, they find out that a partnership tax return is required and may save a lot of tax dollars. At first they are pretty skeptical and thinking that CFO Bridge LLC simply wants to earn fees on two tax filings instead of one.  Their mood changes pretty quickly:  Since only one spouse works the business but both funded it, by definition it is a limited partnership.  Assuming a 50/50 profit sharing, one spouse gets $50,000 and the other gets $50,000.  The working partner is the general partner and has to pay $6,650 in social security tax.  The limited partner pays ZERO!!!  The IRS dirty secret it out.

Caution:  Partnerships are very real animals and legal entities.  If you or our spouse do not like each other, this may not be the best planning strategy for you.  Consult your attorney.

Go Riverdogs!!!

Remember you can always access current and past newsletters on our website…just in case you want another Cup!