Troubleshooting Lacerte diagnostic ref. 3605 for MFJ return (Sch SE)

The following critical diagnostic is generating:

• Schedule C #x: If taxpayer and spouse jointly own and operate a business, they are considered partners in a partnership and should file a partnership return. However, an election may be made under IRC Section 761(f) to file two separate Schedule's C instead of a partnership return. All income and expense items must be allocated to each taxpayer according to the ratio of ownership. If you wish to make this election, a second Schedule C and related forms must be entered in the program to follow the reporting guidelines. However, taxpayer's that wholly own a business as community property under the community property laws of a state, foreign country, or U.S. possession, may treat the business as a sole proprietorship or partnership. Refer to Schedule C and/or IRS Publication 541 for more information. (ref. #3605)

Why is this diagnostic generating?

If the taxpayer's resident state isn't a community property state, you must file the return either:

1. As a partnership or with separate Schedule Cs, or
2. With income and expenses allocated to each taxpayer's own Schedule C based on the taxpayer's percent of ownership.

If the resident state is a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, or WI), you can file the return in three ways:

1. MFJ with income and expenses allocated to each taxpayer's own Schedule C (and related forms) based on the taxpayer's percent of ownership
2. Partnership
3. Proprietorship with a single Schedule C indicated as taxpayer or spouse—not joint

Instructions for residents of community property states electing Schedule C as a proprietorship

Follow these steps to split the self-employment tax between the taxpayer and the spouse:

1. Go to Screen 45, Other Taxes.
2. Select Self-Employment Tax (Sch SE) from the left navigation panel.
3. Scroll down to the Self-Employment Tax (Sch SE) section.
4. Locate the Nonfarm subsection.
5. In the Taxpayer column, enter the spouses' allocated amount as a negative amount in Net income [A].
6. In the Spouse column, enter the spouses' allocated amount as a positive amount in Net income [A].

The program will generate two Sch SE forms—one each for the allocated amount (typically 50/50) without doubling the amount on Sch SE, line 2 for the taxpayer.