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View Full Version : Benefits for partnership vs. sole proprietor?



GreaterVisibility
09-14-2011, 09:36 PM
My wife and I work together every day in our business. I've always just done everything as a sole-proprietor, but recently had a friend and small business owner tell me that their accountant switched them to a partnership and that it resulted in huge benefits for them. So, what are some of these benefits? Can anyone elaborate on the advantages of such if my wife and I were to become a partnership in this? He said something about their house and that it is somehow included in the partnership and they deduct something for it. I don't know, as he wasn't too precise and seemed to just let his accountant handle it. Any input?

vangogh
09-15-2011, 12:29 PM
Good question that I don't know the answer to so I did a little searching. I'm seeing more people suggest that the most benefit where taxes are concerned is for one spouse to be sole proprietor, but then hire the other spouse.

The Many Advantages of Hiring Your Spouse (http://junewalkeronline.blogspot.com/2008/01/many-advantages-of-hiring-your-spouse.html)

This isn't my area of expertise of course. Hopefully Evan will see this thread and be able to offer better advice.

Evan
09-15-2011, 03:34 PM
I'm equally as interested to find out an answer too.. =)

You certainly don't need to be married, or to have a partnership, to claim the "Business Use of Your Home" deduction.

vangogh
09-15-2011, 04:25 PM
I was counting on you Evan. Now what will we do for an answer?

Evan
09-15-2011, 05:21 PM
Ask that accountant. Clearly he's more "creative" than me.

I have a feeling I know what he may have done to try to get those results... but it could have been many things.

GreaterVisibility
09-16-2011, 12:28 AM
I didn't get into details, but it sounded like maybe the accountant put the house in the business's name, as my friend was talking about how he could deduct his mortgage payments. He said that he used to pay quarterlies and still owe a bit at the end, but now he's getting money back somehow under this partnership arrangement. Is there really that much difference between the two structures? Are there some huge benefits to forming a partnership instead of a sole proprietorship? Or is his account just shady?

Evan
09-16-2011, 12:55 AM
Putting the house in the business? Doubtfully, as there are a ton of issues surrounding that if he maneuvered something like that (including malpractice, if you ask me.)

Mortgage payments are never deductible, only the interest portion.

All it sounds like, potentially, is claiming "Business Use of the Home", which allows for you to deduct a portion of your house used exclusively for business and the related mortgage interest, utilities, depreciation, etc. It can be quite a nice deduction, but it has its disadvantages as well and many accountants still don't complete that form properly. Though the taxpayers usually find out about this when they try to sell their home and a portion of their gain is includable as income on their return.

Other than this deduction, adding a spouse to your business isn't going to add any savings. The only way some accountants may try skirting this is if the entity was an LLC and making one spouse hold a 95% limited interest (the one who doesn't actively work on the business) and 5% to the active spouse working. What this is effectively doing is skirting self-employment taxes. The IRS could still take the position that the active LLC member must take a reasonable salary in the form of guaranteed payments and that blows that "tax savings" strategy out the window. Additionally, the courts have not fully resolved whether an LLC interest should be considered a "general" or "limited" interest generally, as there are tax implications (favorable/unfavorable) with each.

GreaterVisibility
09-16-2011, 05:17 PM
I'm just telling you what the guy told me. He and his wife are now partners after talking to this accountant. He does all of the actual work, and she does the paperwork, basically keeping records. She then sends the receipts and other such information off to this accountant, whom they pay $500 a year and have never met, and they get a professionally done folder back with all of their information and returns to sign and file. They told me that they take their house payment off of their taxes now along with all of their utilities and such. I know what the home office deduction is, and this isn't it.

My hunch is that this is just a shady accountant. I am constantly having people refer me to people while telling me stories of how they never have to pay anything and some (like this guy) get money back. Meanwhile, I'm doing my own taxes each year and getting hammered. It seems to me that most of the accountants seem shady as can be, at least those that people have recommended to me. I'm no accountant, but I can read and follow directions, and I've never gotten the results that others have that use accountants. Either they know some voodoo magic that they can whip out and use for huge reduction in taxes paid, or they just flat out cook the books.

vangogh
09-16-2011, 08:28 PM
I'm no accountant, but I can read and follow directions, and I've never gotten the results that others have that use accountants.

Sometimes it's simply a matter of an accountant knowing more. I used to fill out my own taxes and like you followed directions and thought I did a pretty good job. Then I started turning them over to my brother who's an accountant and he saved me some money. He knows from experience that I might qualify for one thing or another and checks some forms I never would have known to check.

I'm sure there are some cases where books are being cooked, but it's not always the case. Sometimes it's just a matter of knowing their job better than we do.

At the same time I don't keep my head in the sand. I have my brother send me my return before he files it and we go over it together.

GreaterVisibility
09-16-2011, 09:32 PM
Sometimes it's simply a matter of an accountant knowing more. I used to fill out my own taxes and like you followed directions and thought I did a pretty good job. Then I started turning them over to my brother who's an accountant and he saved me some money. He knows from experience that I might qualify for one thing or another and checks some forms I never would have known to check.

I'm sure there are some cases where books are being cooked, but it's not always the case. Sometimes it's just a matter of knowing their job better than we do.

At the same time I don't keep my head in the sand. I have my brother send me my return before he files it and we go over it together.

Yes, I realize that. They do know about things that the average person, or tax program available in a retail environment, could know. But I do know this. One person I know had his dad go back and create tax returns where he basically broke even in order to save him because he just didn't file for many years. Another person I know had an addition put onto his home and took it off as though he built an office, when it was simply a family room. The guy here is getting his entire mortgage payment deducted. Someone else told me to call his guy because he made his outstanding tax debt almost disappear. All of these things are being done by accountants. I guess people maybe just don't talk about them when they follow the rules and do what they're supposed to do, but when they don't and get people incredible returns or breaks, then people tend to talk them up.

I'm sure that there are legitimate accountants out there. The whole thing seems like a bad game though where the cheaters continue to win and those that are honest get crushed. Anyway, my thread wasn't meant to take shots at accountants. I just wanted to see if there were huge legitimate difference between the two filings that would result in what this guy was claiming. It doesn't appear that there probably are.

GreaterVisibility
09-16-2011, 09:32 PM
Sometimes it's simply a matter of an accountant knowing more. I used to fill out my own taxes and like you followed directions and thought I did a pretty good job. Then I started turning them over to my brother who's an accountant and he saved me some money. He knows from experience that I might qualify for one thing or another and checks some forms I never would have known to check.

I'm sure there are some cases where books are being cooked, but it's not always the case. Sometimes it's just a matter of knowing their job better than we do.

At the same time I don't keep my head in the sand. I have my brother send me my return before he files it and we go over it together.

Yes, I realize that. They do know about things that the average person, or tax program available in a retail environment, could know. But I do know this. One person I know had his dad go back and create tax returns where he basically broke even in order to save him because he just didn't file for many years. Another person I know had an addition put onto his home and took it off as though he built an office, when it was simply a family room. The guy here is getting his entire mortgage payment deducted. Someone else told me to call his guy because he made his outstanding tax debt almost disappear. All of these things are being done by accountants. I guess people maybe just don't talk about them when they follow the rules and do what they're supposed to do, but when they don't and get people incredible returns or breaks, then people tend to talk them up.

I'm sure that there are legitimate accountants out there. The whole thing seems like a bad game though where the cheaters continue to win and those that are honest get crushed. Anyway, my thread wasn't meant to take shots at accountants. I just wanted to see if there were huge legitimate difference between the two filings that would result in what this guy was claiming. It doesn't appear that there probably are.

Evan
09-16-2011, 10:11 PM
I'm sure that there are legitimate accountants out there.

Yes, I'm sure there must be at least one out there.

From my experience, most people do not actually understand what their accountants are doing to save them money, they just see the savings and assume it is much more than it really is. Tax preparers who knowingly prepare a false return are subjected to severe penalties, and the taxpayers are also equally liable as well. They cannot use the excuse that "XYZ" prepared my returns I had no idea it was wrong, as you should still know what's going on.

The IRS has begun requiring competency tests to prevent any guy off the street from claiming to be a tax preparer. And keep in mind, a tax preparer is different than an accountant, the latter of which usually provides considerable more services and is generally licensed. Those with more credentials usually have more to lose, and while that doesn't mean they are "more honest", they certainly have a lot more in the game to wish to stay honest.

vangogh
09-19-2011, 12:00 PM
I think it's mainly a case where a few bad stand out much more than all the good and so the perception becomes the bad is more prevalent than it really is. You can look at any industry and find people who are less than legitimate.