Dear Rich: My wife and I create applications together. Do we have to file a partnership tax return or can we file as a sole proprietorship? Whoa! The Dear Rich Staff usually doesn't do tax questions but since this is AppDev week here goes ... (and check out our new app developer's guide.)
One Approach. According to this IRS directive, spouses that co-own and run a business in a community property state (Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, and Wisconsin) can operate as a sole proprietorship (or "disregarded entity") and report their business income as part of their joint tax return (which has several obvious benefits) or they can operate as a partnership and file a K-1 partnership return. Couples in non-community property states, see below.
And here's another IRS bulletin. According to this IRS directive, if spouses co-own and run a business in a non-community property state, they must operate as a partnership and file a K-1 partnership return (unless they choose to be treated as a "qualified joint venture.") In all states, if one spouse owns the business and the other works for it, the business is a sole proprietorship, and the owner will have to declare the spouse as an employee or independent contractor. If the spouse occasionally volunteers to help the business without pay, you won't have to declare the spouse as an employee or independent contractor.
Spousal Inspiration. By the way, did you know one of the biggest software companies was founded by husband and wife nerds. Some other couples we love who created stuff together -- Roy Rogers & Dale Evans, John Cassavetes & Gena Rowlands, Louis Prima & Keely Smith, Ashford & Simpson, Charles & Ray Eames, and Masters & Johnson.
