Adjusting Depreciation for Qualified Joint Venture

[MMcCarty1]

My wife and I file separate Schedule Fs for our small farm enterprise  It has been split 50/50 since the beginning with half the cost basis of each asset entered for each spouse.  This year the profit is low and we would like to change her portion to 100% with me claiming no profit in order to give her Social Security credits for the year.  I cannot figure out how to reallocate the depreciation calculated by Turbotax.  As it stands, I am showing a $2700 loss due to depreciation and she is showing a $10000 profit.  This is reflected on the Schedule SEs.  I have tried to increase the cost basis for her assets and reduce it on mine, but I believe the software is adding it as a new cost, versus adjusting the original basis.  Is there any way to adjust this?  I don't mind filing it the way it is and paying the extra SE tax, but will the IRS flag it as a problem?  Any way to fix this?

[tagteam]

I fully understand your motivation in this instance but you are not supposed to change the allocation, in any particular tax year, merely because it creates a tax advantage (note the language below).

The spouses must share the items of income, gain, loss, deduction, and credit in accordance with each spouse's interest in the business.

See https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorpo...

[MMcCarty1]

It's my understanding that "each spouse's interest in the business" is determined by our own partnership agreement, i.e., whatever we want it to be.  Can our agreement not change?  I would assume that it is treated just as any partnership agreement and can be changed by agreement of both parties.

Pub 541 Partnerships:

Partnership Agreement
The partnership agreement includes the original agreement and any modifications. The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement.  The agreement or modifications can be oral or written.  Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. This filing date doesn't include any extension of time.

If the partnership agreement or any modification is silent on any matter, the provisions of
local law are treated as part of the agreement.

It doesn't really create a tax advantage.  The only difference is how the SE earnings are reported.

[MMcCarty1]

I ended up just changing the income and deductions to a 75/25 split versus a 50/50 to cover the depreciation on my filing so that I showed a small profit and she showed the majority of the profit.

If you think this isn't allowed, please chime in with additional clarification.

[Mike9241]

My wife and I file separate Schedule Fs for our small farm enterprise It has been split 50/50 since the beginning with half the cost basis of each asset entered for each spouse. if that is true then this doesn't make sense.

As it stands, I am showing a $2700 loss due to depreciation and she is showing a $10000 profit (unless you have other business activities).  in 2021 you can gift her your entire or even partial interest in the farm - not sure what this would do for you both from a tax standpoint. spouses can make unlimited present interest gifts to each other without having to file a gift tax return. of course title to the property might need to be changed. backdating documents to 2020 for tax purposes could get you in a lot of trouble.

without changing the 50/50 ownership depreciation needs to be split 50/50. 

[Rick19744]

Some comments on your question and follow-up responses:

• Essentially when you set up the partnership, based on your facts, you had a decision to make; either file as a partnership, or make the election to file as a qualified joint venture (QJV).
• When you made the election to file as a QJV, you are no longer under the partnership provisions of the tax code.  Essentially you have elected out of those provisions.
• One of the provisions to be able to make the QJV election, is a percentage interest in the business must be established for both spouses, so that income, gains, deductions, losses, and credits, and determining net earnings from self-employment can be apportioned appropriately (reflected on your Schedule C).  Your agreement was set at 50/50.
• Your quoting commentary in a publication discussing partnership provisions holds no weight as those provisions no longer apply as noted in bullet 2 above.
• You must follow the initial agreement as was in effect when you made the QJV.  If you want to deviate from this, you need to terminate the venture and begin a new one with a new agreement.  The split between husband and wife is based on ownership.  There are no special allocations allowed.

[MMcCarty1]

If you want to deviate from this, you need to terminate the venture and begin a new one with a new agreement.

Um, ok...  We just came to a new oral agreement.  What would terminating the venture look like?  We elected to treat this as a QJV by filing two Form Fs our first year of business, as per IRS rules.  There was no agreement or notification sent to the IRS.  Our agreement is not annotated anywhere besides the fact that our income and deductions were split 50/50 on the first return and a number of subsequent returns.

The split between husband and wife is based on ownership.  There are no special allocations allowed.

Citation?  I guess we'd have to define "interest in the business".  I would think there would be other considerations in such an agreement besides monetary investment and ownership, e.g., division of labor.  Wouldn't a person doing a greater proportion of the work expect a larger income allocation?  Wouldn't such an agreement be expected to change over time if division of labor changes?

[Rick19744]

No agreement is required to send to the IRS.  The agreement is what was determined when you set up the entity and as you stated, it was 50/50.

You defined your "interest in the business" when you stated it was 50/50 regardless of the fact that it may not be memorialized in writing; which it should have been.

No question participation can change, but this can't be decided after the fact based on how you want to allocate the income.  The ability to file as a QJV is an option to simplify the filing process granted by Congress.  You decided to go down this path.  As a result, if you want to change the allocation, you need to do that at the beginning of the year (or at least prospectively), not afterwards and it needs to be a direct split, no special allocation of specific deductions. 

QJV is addressed in IRC Section 761(f).

Once again, you are NOT under the partnership provisions.  AND special allocations in the partner provisions are way beyond this forum and should only be done with competent tax professionals as there are complex provisions that need to be met.

[tagteam]

In concur with everything in @Rick19744's posts. Then there is this:

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@MMcCarty1 wrote:

It doesn't really create a tax advantage.  The only difference is how the SE earnings are reported.

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That would be considered to be a tax advantage (i.e., creating SE credits where none would otherwise exist).