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Sole proprietorship married filing jointly

My husband and I file...

My husband and I file taxes jointly but I just began a sole proprietor business (dba) and I filed the sole proprietor business with our joint taxes for the first dba year. My husband is now concerned that he would be liable for anything that happened in my dba and wants to have me file the dba separate from the joint family taxes. Is a change legal and if so what form needs to be filled out to make the separation of the joint family taxes from my dba sole proprietor taxes? I am new to this and don't want a subscription at this point. Can you send the response to my email because I don't know where to get the response?

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Answered in 5 hours by:
8/20/2011
Tax.appeal.168
Tax.appeal.168, Tax Accountant
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Filing "married filing jointly" only makes your husband partially liable for any taxes that may be owed for the business. Unless he is part owner of the business, he is not legally liable for anything else relating to the business. In order to make the change, you would have to file an amended return, changing your filing status from married filing jointly to married filing single. The amended return is the Form 1040X. Please note that if you do change your filing status to "married filing single", the two of you will not be eligible for some the tax credits that are available to couples who file married filing jointly. "Married filing single" is like filing "single". I hope this clarifies matters for you.

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Customer reply replied 6 years ago

Can you tell me what my husband would be "partially liable for" if we keep my sole proprietor business taxes together with the family taxes? My husband is not a partner with my sole proprietor business. Thanks much assisting in this decision!

Hello again,
My apologies, I should have worded my response differently. What I should have written is that your husband will be equally responsible for any taxes that may be due on the business if the two of you file "married filing jointly".
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Customer reply replied 6 years ago

Thanks for your clarification Angela. But if I continue to file my sole proprietor business with the family taxes is my husband's finances liable for say a lawsuit against my business or any liability other than tax liability? I think that should clarify it to my satisfaction. Thanks a lot.

Oh my husband just walked in the room and asked me to add: If we separate the sole proprietor business from the family taxes does my husband retain the tax deduction for supporting me-- under the cash or under the accrual or both?

If you live in a community property state, your husband could be legally if a lawsuit were to be filed against the business whether or not you filed married filing jointly or married filing single. SEE BELOW. Whether you and your spouse are liable for each other's debts depends mostly on where you live. In the handful of states with "community property" rules, most debts incurred by one spouse DURING the marriage are owed by both spouses. But in states that follow "common law" property rules, debts incurred by one spouse are usually that spouse's debts alone, unless the debt was for a family necessity, such as food or shelter for the family or tuition for the kids. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. (In Alaska, spouses can sign an agreement making their assets community property, but few people choose to do this.) In community property states, most debts incurred by either spouse DURING the marriage are owed by the "community" (the couple), even if only one spouse signed the paperwork for a debt. The key word here is DURING the marriage. If you do not live in a community property state, the answer to your question would be no, since your husband is not a partner in the business, he would not be liable if a legally liable if a lawsuit was filed against the business. If the two of you file separately, your husband cannot claim you as an exemption.

clarification on last sentence:

...he would not be legally liable if a lawsuit was filed against the business if you do not live in a community property state.

In addition, couples in community property states can sign an agreement with each other to have their debts and income treated separately. Signing a pre- or postnuptial agreement like this can make sense for a couple before one spouse goes into business. (But if you're already in business, signing an agreement now won't protect your spouse from liability for business debts that you already owe, only from liability for future business debts.)

For reference purposes, you can refer to IRS Publication 17, and IRS publication 555.

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Customer reply replied 6 years ago

One part left unanswered: I am now filing jointly under cash method accounting, would my personal tax deduction no longer apply to the family tax deduction filing if I were to change to the accrual tax system of accounting for my sole propriotership. Soooomany questions SooooEmbarassing but wow do you help..

I'm glad that I can help. You will receive a personal tax deduction either way, whether you choose the cash or accrual method. The difference would be the following;
Cash basis tax payers include income when it is received, and claim deductions when expenses are paid.
Accrual basis taxpayers include income when it is earned and claim deductions when expenses are incurred.
The accounting method that you choose will affect the reporting of your income and deductions for the business, which in turn would affect your personal tax deduction.
I hope this clarifies matters for you.
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Customer reply replied 6 years ago
THANK YOU SO VERY MUCH! You developed our thinking with your knowledge and information and we have decided to go with keeping a joint account with the sole proprietor together. And no!-- you are not liable for our choices!-- HA!! Best Blessings to you, Angela-- you really outdid yourself here-- I didn't even know we had all those questions to ask! No response needed-- enough is enough!!!!!!!!!!!!!!
Jax Tax
Jax Tax, Tax Attorney
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Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Excuse me for coming in. First. You cannot amend a married joint return to married filing separate. There is no reason running a business should cause you to file separate. Pay your estimated tax payments and keep good records and there is nothing to worry about. Yes, if you owe income tax from your earnings and file joint, he is liable.As for other liabilities like lawsuits, no one should operate as a sole prop. He and you should be worried. At a minimum set up a single member LLC and make sure to use a separate bank account for the business. This will protect him and you partially from other damages. Again, you cannot amend a joint return to married filing separate. Yes it is married separate not married filing single.

My apologies,...regarding the amending to change the filing status from MFJ to MFS (if the return was already filed), the other expert is correct. The following are the rules for that;

Changing your Filing Status

If you file a valid joint return, you cannot change your filing status after the original due date (or after the extended due date if the original return was filed under extension) from married filing jointly to married filing a separate return unless:
• You annulled your marriage during the tax year.
• The joint return was not valid because you were not married.
• An executor or administrator disaffirms a joint return by filing a separate return for the decedent within one year after the last day allowed for filing the surviving spouse's return (including extensions).
• For tax years beginning January 1, 2000, one spouse was an active duty
military member during the tax year.
• For tax years beginning January 1, 2000, one spouse was a nonresident for the entire year and had no income from California sources during the tax year. (See FTB Pub. 1031. If I wrote married filing single...the correct phrase is married filing separately. I don't lose too many browning points.

Regarding the SMLLC option (Single Member LLC) that was mentioned by the... OTHER expert. Here are the rules for that:

A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a “disregarded entity” which is taxed as a sole proprietor for income tax purposes.

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Regarding the SMLLC option (Single Member LLC) that was mentioned by the... OTHER expert. Here are the rules for that:
A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a “disregarded entity” which is taxed as a sole proprietor for income tax purposes.
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