For reasons not relevant here I and my wife are required to file separately this year. I own a couple Sch. C Sole Proprietor businesses in which I materially participate, but she does not. The businesses have inventory. We also have a prenup agreement that pretty much keep our income finances separate.
However, we are in California - a community property state. So my understanding is that in a community property we are required to allocate the Sch. C profits/losses 50/50 to each of us regardless, and whether we like it or not (we'd rather not).
Two questions:
1) Is that correct, or is there a way for me to put all the profit/loss on my own return?
2) It's easy enough to split all expenses and revenues, but how do you treat beginning and ending inventory counts? This is the 1st year she's filing a tax return in US and my businesses existed before that.
Do you I put each spouse's beginning of the year inventory as half of what it actually is (and same for year end)?
That would appear to create a contradiction with previous year's return - my 2021 beginning inventory would show as half of 2020 year end inventory.
And her new" business would appear to start with an inventory which came out of nothing.
That seems like an instant red flag for an audit for both of us.
