Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Capital is material. Capital is a material in

ship by making a Qualified Joint Venture Elec

If the partnership agreement or any modifi

comeproducing factor if a substantial part of

tion.

cation is silent on any matter, the provisions of

the gross income of the business comes from

local law are treated as part of the agreement.

Qualified Joint Venture Election. A "qualified

the use of capital. Capital is ordinarily an in

joint venture," whose only members are spou

comeproducing factor if the operation of the

Terminating a

ses filing a joint return, can elect not to be trea

business requires substantial inventories or in

ted as a partnership for federal tax purposes. A

vestments in plants, machinery, or equipment.

Partnership

qualified joint venture conducts a trade or busi

Capital is not material. In general, capital is

ness where: the only members of the joint ven

A partnership terminates when one of the fol

not a material incomeproducing factor if the in

ture are spouses filing jointly; both spouses

lowing events takes place.

come of the business consists principally of

elect not to be treated as a partnership; both

fees, commissions, or other compensation for

spouses materially participate in the trade or

1. All its operations are discontinued and no

personal services performed by members or

business (see Passive Activity Limitations in the

part of any business, financial operation,

employees of the partnership.

Instructions for Form 1065 for a definition of ma

or venture is continued by any of its part

terial participation); and the business is

ners in a partnership.

Capital interest. A capital interest in a partner

coowned by both spouses and is not held in

ship is an interest in its assets that is distributa

2. At least 50% of the total interest in partner

the name of a state law entity such as a partner

ble to the owner of the interest in either of the

ship capital and profits is sold or ex

ship or LLC.

following situations.

changed within a 12month period, includ

Under this election, a qualified joint venture

The owner withdraws from the partnership.

ing a sale or exchange to another partner.

conducted by spouses who file a joint return is

not treated as a partnership for federal tax pur

The partnership liquidates.

Unlike other partnerships, an electing large

poses and therefore does not have a Form

partnership does not terminate on the sale or

The mere right to share in earnings and prof

1065 filing requirement. All items of income,

exchange of 50% or more of the partnership in

its is not a capital interest in the partnership.

gain, deduction, loss, and credit are divided be

terests within a 12month period.

tween the spouses based on their respective in

Gift of capital interest. If a family member (or

terests in the venture. Each spouse takes into

See section 1.7081(b) of the regulations for

any other person) receives a gift of a capital in

account his or her respective share of these

more information on the termination of a part

terest in a partnership in which capital is a ma

items as a sole proprietor. Each spouse would

nership. For special rules that apply to a

terial incomeproducing factor, the donee's dis

account for his or her respective share on the

merger, consolidation, or division of a partner

tributive share of partnership income is subject

appropriate form, such as Schedule C (Form

ship, see sections 1.7081(c) and 1.7081(d) of

to both of the following restrictions.

1040). For purposes of determining net earn

the regulations.

It must be figured by reducing the partner

ings from selfemployment, each spouse's

ship income by reasonable compensation

share of income or loss from a qualified joint

Date of termination. The partnership's tax

for services the donor renders to the part

venture is taken into account just as it is for fed

year ends on the date of termination. For the

nership.

eral income tax purposes (i.e., based on their

event described in (1), above, the date of termi

The donee's distributive share of partner

respective interests in the venture).

nation is the date the partnership completes the

ship income attributable to donated capital

If the spouses do not make the election to

winding up of its affairs. For the event described

must not be proportionately greater than

treat their respective interests in the joint ven

in (2), above, the date of termination is the date

the donor's distributive share attributable

ture as sole proprietorships, each spouse

of the sale or exchange of a partnership interest

to the donor's capital.

should carry his or her share of the partnership

that, by itself or together with other sales or ex

income or loss from Schedule K1 (Form 1065)

changes in the preceding 12 months, transfers

Purchase. For purposes of determining a

to their joint or separate Form(s) 1040. Each

an interest of 50% or more in both capital and

partner's distributive share, an interest pur

spouse should include his or her respective

profits.

chased by one family member from another

share of selfemployment income on a separate

family member is considered a gift from the

Schedule SE (Form 1040), SelfEmployment

Short period return. If a partnership is termi

seller. The fair market value of the purchased

Tax.

nated before the end of what would otherwise

interest is considered donated capital. For this

This generally does not increase the total

be its tax year, Form 1065 must be filed for the

purpose, members of a family include only

tax on the return, but it does give each spouse

short period, which is the period from the begin

spouses, ancestors, and lineal descendants (or

credit for social security earnings on which re

ning of the tax year through the date of termina

a trust for the primary benefit of those persons).

tirement benefits are based. However, this may

tion. The return is due the 15th day of the fourth

not be true if either spouse exceeds the social

month following the date of termination. See

Example. A father sold 50% of his business

security tax limitation.

Partnership Return (Form 1065), later, for infor

to his son. The resulting partnership had a profit

mation about filing Form 1065.

For more information on qualified joint ven

of $60,000. Capital is a material incomepro

tures, go to IRS.gov, enter “Election for Quali

ducing factor. The father performed services

Conversion of partnership into limited lia

fied Joint Ventures” in the search box and se

worth $24,000, which is reasonable compensa

bility company (LLC). The conversion of a

tion, and the son performed no services. The

lect the link reading “Election for Husband and

partnership into an LLC classified as a partner

$24,000 must be allocated to the father as com

Wife Unincorporated Businesses.”

ship for federal tax purposes does not terminate

pensation. Of the remaining $36,000 of profit

the partnership. The conversion is not a sale,

Partnership Agreement

due to capital, at least 50%, or $18,000, must

exchange, or liquidation of any partnership in

be allocated to the father since he owns a 50%

terest; the partnership's tax year does not close;

capital interest. The son's share of partnership

The partnership agreement includes the original

and the LLC can continue to use the partner

profit cannot be more than $18,000.

agreement and any modifications. The modifi

ship's taxpayer identification number.

cations must be agreed to by all partners or

Business owned and operated by spouses.

However, the conversion may change some

adopted in any other manner provided by the

If spouses carry on a business together and

of the partners' bases in their partnership inter

partnership agreement. The agreement or mod

share in the profits and losses, they may be

ests if the partnership has recourse liabilities

ifications can be oral or written.

partners whether or not they have a formal part

that become nonrecourse liabilities. Because

nership agreement. If so, they should report in

the partners share recourse and nonrecourse li

Partners can modify the partnership agree

come or loss from the business on Form 1065.

abilities differently, their bases must be adjus

ment for a particular tax year after the close of

They should not report the income on a Sched

ted to reflect the new sharing ratios. If a de

the year but not later than the date for filing the

ule C (Form 1040) in the name of one spouse

crease in a partner's share of liabilities exceeds

partnership return for that year. This filing date

as a sole proprietor. However, the spouses can

the partner's basis, he or she must recognize

does not include any extension of time.

elect not to treat the joint venture as a partner

gain on the excess. For more information, see

Publication 541 (December 2013)

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Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2013 Page 3

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