From a tax standpoint, filing as a partnership or with two schedule Cs as a qualified joint venture will not make any difference to your taxes. Since you live in a community property state, you qualify to file as a partnership or by reporting each of your shares of income and expenses on two schedule Cs.
There are positives and negatives to each. Business returns filed using schedule C have a higher chance of being audited than business returns filed on form 1065. However, if you do use form 1065, the IRS will try and assess a penalty every year you file after the partnership return deadline. The form 1065 penalty is generally reversible as long as you file your personal return timely by the extended deadline in October - but it is a hassle.
Here are the requirements to file your business tax information as a qualified joint venture.
Partnerships (or LLCs in community property states) with husband and wife owners can file schedule Cs for each of their portions of the partnership’s income instead of filing a Form 1065 partnership return by electing to be treated as a qualified joint venture. The requirements are as follows:
The business is unincorporated or not organized as a limited liability company (unless the husband and wife live in a community property state).
The only owners of the business are the husband and wife.
Both spouses materially participate in the business operations.
Both spouses agree and elect not to file their tax return as a partnership.
Each spouse reports their full share of income and expenses on separate schedule Cs.
