My partnership was registered with my ex-wife as a partner, but she is no longer part of the business. How do I change my federal and state tax identification numbers? Is there anything else I need to do? --S.T., Monticello, N.Y.
Let's assume that you and your ex-wife were the only partners in your business, and it was legally structured as a partnership, as opposed to a limited liability company. Given those circumstances, the partnership would be considered terminated when your ex-wife left the company, experts say, and your company would now be a sole proprietorship.
If you and your ex had other partners in the business who are continuing with the company, however, it would remain a partnership -- albeit with one fewer partner.
DIVORCE AND TAXES. At this point, you should file your final partnership tax returns -- both state and federal -- which serve as notification of the change. "Changing partners in a business is not like changing partners in a marriage," says Donald Lucove, a CPA with Lucove, Say & Co., based in Calabasas, Calif. "The Internal Revenue Service...is notified when the partnership tax return [Form 1065] is filed. The 1065 includes a form K1 for each partner. On the K1, there is a box to indicate that this is the final K1 for that particular partner."
Talk to a local attorney about whether you need to file a formal partnership dissolution with the state or county, advises Alan Weiner of Holtz Rubenstein Reminick LLP, a CPA firm based in Melville, N.Y.
You'll also need to apply to the IRS for a new federal tax ID number, and likely for a new state tax identification as well, Lucove says. "Your old federal tax ID number would die with the partnership," he notes. "If you plan to continue as a sole proprietor, you'll have to apply for a new one."
"STEPPING UP" INTEREST. If your partnership was formally designated as a limited liability company, different rules may apply. New regulations issued for LLCs last fall might come into play, Weiner says, so consult with a local tax adviser.
You should also ask about the tax implications involved if you purchased your ex-wife's ownership interest in the company, says Gregg R. Wind, a CPA based in Marina del Rey, Calif. In some circumstances, you could elect to "step up" the basis on your interest inside of the partnership, or you could keep track of it outside the partnership, Wind says. But "if your ex-wife's interest in the partnership was transferred to you as part of a marital settlement agreement, there would be no step-up in basis," he adds. Good luck!