Registered domestic partners (RDPs) should report community income from a business on Schedule C, Profit or Loss From Business, by following these steps:
- Divide Income and Deductions Equally: Each registered domestic partner must report half of the income, deductions, and net earnings of the business on their respective Schedule C forms. This is because community property laws require that community income be split equally between the partners.
- Self-Employment Tax: Each partner owes self-employment tax on half of the net earnings of the business. The self-employment tax rule under section 1402(a)(5), which attributes the income, deductions, and net earnings to the spouse who carries on the trade or business, does not apply to registered domestic partners. Therefore, each partner must calculate and pay self-employment tax on their share of the net earnings.
- Form 8958: Both partners must attach Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, to their individual tax returns. This form is used to show how the community income and deductions are divided between the partners.
- Filing Status: Registered domestic partners cannot file using the "married filing jointly" or "married filing separately" statuses. Instead, they must use the "single" or "head of household" filing status, if they qualify.
- Business Expenses: Each partner should report their share of business expenses on their respective Schedule C forms. This includes all ordinary and necessary expenses incurred in the operation of the business.
- Consistency in Reporting: It is important that both partners consistently report their share of the income and deductions. Any discrepancies could lead to issues with the IRS.
By following these steps, registered domestic partners can ensure that they are correctly reporting their community income from a business on Schedule C, in compliance with federal tax laws.
Sources:
Publication 555 (3/2020)
Rev. Rul. 2013-17
CCA 201021050
IRM Part 25. Special Topics. Chapter 18. Community Property. Section 1. Basic Principles of Community Property Law
2023 Instructions for Schedule C (2023)
Publication 334 (2023)
