Must Joint Activities be Treated as Partnerships?

Filing taxes is confusing; that’s simply a fact of life. Filing gets even more confusing when you have to account for your joint activity, and you aren’t sure if you have to file jointly with your partner or if you can both do separate returns. Filing separate returns might be preferable for their simplicity if nothing else, but filing incorrectly can lead to some stiff penalties from the IRS. So do you file jointly or separately?

The answer depends on a variety of factors that mostly have to do with the details of the partnership. The general rule is that you will have to file jointly on any partnership where business choices, investments, and profits are split. This rule would apply even if state law does not regard your joint venture as a partnership. However, this rule is not all encompassing, and there are several factors that could allow you to file your returns separately. For example, simple co-ownership of realty and an agreement to maintain the property or even sharing expenses does not create a partnership in the eyes of the IRS. Some of the other factors that the IRS will look to when determining what does and does not make a partnership include the specifics of the joint venture. In the past, Tax Courts have examined the control of the venture’s bank account to help decide if it constitutes a partnership. They have also looked at agreements to perform certain tasks within the venture, contributions of capital, who claims tax deductions, if the venture is in both parties name, and even how financial records are kept. Even all of this info can still prove inconclusive, but it will certainly point towards one way or the other.

In some circumstances, there may another way to file your tax returns separately. If you meet the criteria, you can usually opt to elect-out of your partnership. Jointly owned investment property can be opted out of if both parties have used their shares independently and do not have any ongoing business activities. Joint operating agreements can opt out of if they jointly produce or use property, are co-owners with exclusive operating rights, and can separately take their shares. Securities dealers can opt out in most cases where a short term venture was undertaken to sell securities. Make sure you know what your status is before filing to avoid the wrath of the IRS.