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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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My family began a small plant (flowers, herbs, teaching) based

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My family began a small plant (flowers, herbs, teaching) based business this growing season, with not more than $1500 in gross sales for this first year. We have a few questions, which are inter-related: 1. temporary entity and family ownership issues; 2. Income tax issues We do not have a formal entity selected, yet. Originally, we intended to file an LLC but held off for additional planning, and next year we will have only a small amount of time to devote to the business. Now that it is at the end of this first sales year, we need to do something with entity in order to pay the sales tax on the applicable products sold. This sales tax comes to either $58.29 or $71.74 (Side Note: We are not sure if we pay sales tax for items that were sold through a co-op who collected sales tax from the end customer, we never received a form 13 to hold.) If we file as a sole proprietor - either "mom" or "dad" on joint tax form - then our entrepreneurial 14 year old son receives no credit for his hefty "sweat-equity" dedication towards his portion of the business which is the cut-flowers and plants. Mom especially was involved in teaching about herbs. The whole family helped with all aspects. However, the approximate $7,000 in start-up/ongoing expenses for this first year was 99%financed by Mom and Dad's personal savings and credit cards and if we do not list mom or dad as owner, then what do we do with our costs? (There is a reason to show ownership for 3 years for the possiblity of future financing.)  The second question answer relies on the answer to the first question. Obviously, with significant start-up costs we do not plan to take any "income" from the business, but how do we go about listing the sales/"costs" on our tax return?
Submitted: 3 years ago.
Category: Tax
Expert:  jgordosea replied 3 years ago.

Greetings,

 

If the participation of both spouses is significant (such that it would not be proper for one spouse to claim the activity as a sole proprietorship), then either a partnership return or two separate Schedule C wherein each spouse takes into account his or her respective share of the business items as a sole proprietor will be used.

 

For more on each spouse using a Schedule C for their portion, please see Husband and Wife Business "The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes."

 

It may even more accurately reflect the various activities within the business (such as the teaching being reported only by the mom) by using two Schedule C in a joint return.

 

When filing Schedule C, whether one or two, the efforts of the son would be recognized by paying a wage or salary to the son. The son will not have to pay FICA but will have earned income subject to income tax

See Family Help and links at Businesses with Employees for details.

 

If the business was actually a three member partnership then a partnership return will be filed (whether or not you formed an LLC). See Partnerships for more details.

Of course, to file a return the partnership will need an Employer ID Number (EIN)

 

So, you will have to decide whether the activity was a sole proprietorship, a joint activity by spouses reported as two proprietorships or a partnership.

In the first two cases the son would be an employee and in the last a partner.

 

The start up costs would be deducted by the proprietor, allocated between the spouses or taken by the partnership.

 

Best wishes on your family business.

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3038
Experience: I've prepared all types of taxes since 1987.
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