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Evan
10-22-2012, 11:20 AM
Today I stumbled across this article:

http://www.forbes.com/sites/peterjreilly/2012/10/21/beware-of-partnership-status-sneaking-up-on-your-business-venture/ (http://www.forbes.com/sites/peterjreilly/2012/10/21/beware-of-partnership-status-sneaking-up-on-your-business-venture/)

While it seems easy to see from the facts it should have been filing as a partnership, many businesses which are in fact partnerships decide not to file it and just "report their portion on their own". When you make up allocation percentages that aren't consistent with an agreement, you will very likely have all expenses denied and then have to prove your expenses/allocation.

Avoid this by making sure you have a proper partnership agreement in place and then file a partnership tax return. You'll avoid many headaches.

vangogh
10-22-2012, 11:27 PM
Thanks Evan. Interesting read. I'm not sure why they didn't file as a partnership, but it's pretty clear they should have. I'm sure they're wishing they had looking back.

I think too many times people don't file as they should either because they think it would be too hard or more likely because they think they can avoid paying some kind of tax. There are usually some options, but you shouldn't look outside the options that fit what your business is.

ArcSine
10-23-2012, 03:59 PM
Ditto on the thanks, Evan, the case calls into question some common misperceptions. There are some industries in which cost-sharing arrangements are common; multi-physician medical practices come immediately to mind, but there are others. Separate sole proprietors (or 1-owner S corps) sharing office space, lab facilities, diagnostic equipment, nursing and admin staff, and so on.

One of the takeaways of the article you linked is that the operators of such business models should examine their setups carefully (along with their tax advisor) to make sure they haven't crossed a fine line over to an arrangement that the IRS might assert has become a de facto partnership for tax purposes.

Business Attorney
10-23-2012, 05:46 PM
That's an interesting article, but one of the most interesting points to me is the part that reads "William had significant income from an accounting practice ...". My guess is that the father was someone who knew better and was trying to allocate a disproportionate share of the expenses to himself.

The point of the article is well taken, though. If two or more people are involved in a profit-making activity where there is any sharing of the profits, they are a partnership for tax purposes (certain narrow activities excepted). They should have a written partnership agreement that clearly spells out how items of income and expense are allocated, particularly if they are not allocated across the board in accordance with a fixed percentage.

vangogh
10-25-2012, 12:43 PM
My guess is that the father was someone who knew better and was trying to allocate a disproportionate share of the expenses to himself.

I had the same feeling. I didn't get the impression this was all an innocent mistake, but rather someone specifically looking for how they could avoid paying some taxes.

jim.sklansky
02-02-2013, 03:12 PM
interesting article...