How transition from Sole Proprietorship to Partnership

for their return, you may be able to file as a qualified joint venture (provided the partnership is not an LLC) . no partnership return is required. 

 

Business owned and operated by spouses. Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership and you must file Form 1065.
Exception—Qualified joint venture. If you and your spouse materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make an election to be treated as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return.

A qualified joint venture conducts a trade or business where the only members of the joint venture are a married couple who file a joint return; both spouses materially participate in the trade or business (because mere joint ownership of property isn’t enough); both spouses elect not to be treated as a partnership; and the business is co-owned by both spouses and isn't held in the name of a state law entity such as a partnership or limited liability company. To make this election, you must divide all items of income, gain, loss, deduction, and accordance with your respective interests in the venture. Each of you must file a separate
Schedule C or F (Form 1040). On each line of your separate Schedule C or F (Form 1040), you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE
(Form 1040) to pay self-employment tax, as applicable.  Electing qualified joint
To make the qualified joint venture election for 2021, jointly file the 2021 Form 1040 or 1040-SR with the required schedules. This generally doesn't increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based, provided neither spouse exceeds the social security tax limitation. Once made, the election cannot be revoked without IRS consent. If you and your spouse filed a Form 1065 for the year prior to the election, you don't need to amend that return or file a final Form 1065 for the year the election takes effect.
For more information on qualified joint ventures, go to IRS.gov/QJV.

 

 

 

for her cgs section show the portion transferred to him as withdrawn for personal purposes and on his show as purchases.

 

 

 

Because it appears that your daughter will still be filing a Schedule C for 2021, we can provide some general guidance on certain issues that you will probably need to consider for tax years 2021 and 2022.  It may be appropriate to retain the services of a qualified professional who can provide advice regarding tax issues specific to the closing of the Schedule C business and the transfer/contribution of property to the partnership.

 

In connection with closing the Schedule C business, as it appears this will be the final year of that business, you will need to show a disposition of the business assets.  Moreover, because a partnership is involved, for tax year 2022, you will need to purchase TurboTax Business which is a different application from TurboTax Home & Business.    

 

With regard to the depreciated assets that are being transferred, such transfers are generally tax-free to the contributing partner.  Your daughter would then receive a credit to her capital account for the contribution in the amount of the current value of the property.  Your daughter may have a taxable gain if she was relieved of any liabilities associated with any transferred property that was subject to debt to the extent such relief from liability exceeded her basis in the contributed property.   

 

You would not need to depreciate the inventory as inventory is never depreciated.  The cost of inventory is only deducted when the inventory is sold.  To the extent the cost of any unused inventory has already been deducted, you would not deduct it again when the inventory is eventually sold by the partnership.  Additionally, the transfer of the inventory from the Schedule C business to the partnership will become part of your daughter's capital contribution to the partnership.  

The sole prop is closed and the partnership is started ... you MUST get a new EIN for the partnership.  You cannot continue to use the same EIN as the sole prop had.  

 

https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-a-new-ein

Some comments regarding your limited facts and questions:

• The first thing you need to do is get a new EIN as noted by @Critter-3 
• Until we understand the following, we can't provide good direction for 2022
  • As asked in another thread, is the new structure a partnership or an LLC?
  • What state are husband and wife living in?
  • Does the business operate outside of the state of residence of the partners or members?
  • How was the entity funded?  Any cash contributed?
  • Is there any debt associated with either the inventory or assets?

As you can see, regardless of the size of the entity, the tax issues can get complicated quickly.

Whoa... I've learned a lot of stuff here!

 

I failed to mention that both are LLCs in the State of MN.

 

We've decided to try to get advice from a local tax prep pro (so far no luck, they are not taking on more work).

 

It appears that they need to close the Sole Proprietorship, dispose of inventory and surrender the EIN and apply for a new EIN for the Partnership.

 

Evidently, the IRS cares if it is, for example, a Sole Proprietorship, Partnership etc, for tax purposes, but not so much whether or not it is an LLC: the MN Secretary of State cares the opposite.  Is this statement accurate?

 

I thank everyone very much for pointing me in the right direction!

 

 

 

The "LLC"  is a state designation not a federal one ... a single member LLC  that doesn't incorporate is a sole prop.   A multi member LLC is considered a Partnership unless they choose to be taxed as a corporation.   And it you choose to be a corporation you need to make the S-Corp election otherwise you are automatically a C-Corp.  

 

And if you don't know how to set up the books for your entity then you have much more to learn.  Seek out a local bookkeeper that does taxes  or visa versa.  A CPA is not needed but do find at least an Enrolled Agent.