One of my readers sent me a question about a farming operation that applies to many farm families. I am going to summarize the question as follows:
160 acre cropland is titled as Kevin XXX and Mary XXX, JTWRS (50%) and The Jane M YYYY Trust (50%). Kevin and Jane M are brother and sister. Mary XXX is Kevin's wife. Kevin and Mary also have a 240 acre operation of their own.
Is a partnership return REQUIRED to be filed or can Jane M and Kevin XXX each allocate their share of expense/income attributable to the 160 acre operation.
Can you provide me some info? What's the penalty for not doing it correctly.
As you can see from the facts, this is a fairly normal situation where property was probably inherited from a mom or dad and it is titled as co-owners in the brother (including wife) and sisters name. The brother is also farming other property.
Normally, anytime property is owned by more than one party, a partnership of some type is involved. This usually requires the filing of a partnership income tax return. Until a few years ago, the penalty for not filing a partnership income tax return was minimal as long as all of the partners reported their share of the income timely.
However, with last year's new tax laws, the penalty for filing a late partnership income tax return can now be pretty steep. The penalty is now equal to $195 per partner for each month that the return is late with a maximum of 12 months. Therefore, under the current case, if a partnership return is required and they never file one, the IRS could assess penalties on three partners for twelve months at $195 per month. This penalty would equal $7,020 which is substantial.
If the parties want to not to file a partnership return, then can make an election to opt out of the partnership rules. I will discuss this election in a near future post, but as you can see, the penalty for not making the election can be substantial.
I will have a couple more posts on this subject over the next week or two.