Partnership and Marriage

[Chrissy19]

My wife and I got married in 2021. In 2020, we started a S Corporation partnership in Maryland. Its a very small business selling natural beauty products and jewellery. It's basically a hobby that we both shared, selling the items at fairs and events. So the income is very small (apx $1000 per year). The 1st year filing, we were required to purchase the offline TurboTax Business software in order to create a schedule K-1 to divide our costs and income. 2021, I mainly did everything on my own (selling and buying supplies). We are not concerned with dividing costs and will be filing jointly as a married couple. Are we still required to do the schedule K-1? I heard something about filing as a joint venture, but it was a little confusing. 

We are just hoping to keep filing as simple as possible by doing everything on a joint 1040. 

[Carl]

An S-Corp is required to file the 1120-S tax return. There is no easier way. So you'll still have to deal with the K-1's. Also note that the owner's of an S-Corp can also be W-2 employees of that S-Corp if desired.

[Rick19744 · Accepted solution]

A few comments regarding your question:

• You are using "partnership" and "S corporation" together as if they are one and the same.  They are not the same.  You can be an LLC that elected S corporation status or you could be just a regular S corporation under state law. 
• If you are an S corporation, then you need to continue to file as an S corporation regardless of who does the work or who is active.  This means filing a form 1120-S and the appropriate K-1's.
• There are rules that apply to hobbies, and those same rules apply even if you are an S corporation.  These rules recently changed in that you must report your income, but are no longer able to deduct expenses as itemized deductions (more on this later).  You are allowed to deduct your cost of goods sold from your income.
• When filing your S corporation return, you should be reporting the income on Schedule K "other income" line 10.  You do not report any activity on page 1 of the 1120-S.  You then report your expenses on Schedule K line 12d "other deductions.  The reason for this is you do not have a trade or business since this is a hobby.  Reporting the activity in this manner is to prevent individuals from circumventing the hobby loss rules.  When reporting your income on Schedule K line 10, only deduct your cost of goods sold from the income and report that figure on this line.  All other expenses should be reported on Schedule K line 12d.
• Not sure if you had any professional advice prior to setting up your business, but an S corporation is not the best vehicle for your endeavor.  It just causes you to file another tax return and additional scrutiny from the IRS.  The IRS is focused on S corporations and paying out wages.  You most likely are not paying yourself a wage.  Given your activity level, this is understandable, but just adds a level of audit risk; not good or bad, just another level of audit risk.