Allocation of S-Corp Income in Texas Divorce

[msmith7305]

Texas couple divorces in 2022. Lived together until April 30, 2022 and divorce is final August 31, 2022.

Wife is sole shareholder in S-Corp. For 2022 her net income on K-1 is $72,000.

My understanding is that, when filing their individual tax returns, they are to split the community income 50-50 up until the date the divorce is final.

However, how is the S-Corp income allocated when all you have is the final K-1? Pro-rate to the date of divorce?

Are there any differences between the allocation of S-Corp income and Partnership income?

Opinions and references would be greatly appreciated.

[Terry53029]

See this link,

 https://guides.sll.texas.gov/community-property#:~:text=Texas%20is%20one%20of%20nine,of%20property%2....

[BobKamman]

That link will tell you more than you need to know.  The first question is whether there is anything in the decree or settlement agreement.  The second question is when does the community end in Texas -- in some states, it's when the divorce petition is filed.  Elsewhere, results may vary.  Look it up.  

[msmith7305]

Thanks for reply. No mention of any tax reporting in agreement. Community ends date of divorce. The TX law link is great for TX divorce law, however, I am asking regarding Federal tax law on proper allocation of passthrough income from S-Corps and Partnerships. 

[msmith7305]

Thanks for the link, I have used it before. However, I found nothing regarding federal tax treatment of passthrough income at all.

[sjrcpa]

S Corp income is allocated on a per share per day basis, aka pro rata, unless a cutoff the books election was made.

[BobKamman]

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@msmith7305 wrote:

My understanding is that, when filing their individual tax returns, they are to split the community income 50-50 up until the date the divorce is final.

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 Why is that your understanding?  Did she tell you it's community property?  How was it handled on the 2021 return?  (They went from filing joint returns in April 2022, to splitting the sheets the same month?)

[msmith7305]

Bob -

In Texas, with rare exception, income from separate property is community income. 2021 was joint return. And yes, they split the sheets in April 2022. 

[BobKamman]

I think I know a little about community income, having practiced in Arizona for the last 45 years.  I have many married clients with separate property, either because they owned it before marriage and did not commingle it, or because they have prenuptial or postnuptial agreements.  If you can't answer a simple question about how you know it's not separate property, then I also wonder how much you know about your client.  You're not doing returns for both ex-spouses, are you?

[MartyJM]

If there is substantial S Corp stock in a separate property trust in Texas and the married couple have been paying taxes via their IRS married filing jointly returns reported by a K-1 from the trust on all earnings, not just distributed earnings (but also retained earnings). How is the spouse that does not have interest in the separate property trust get compensated for the half of the retained earnings they have paid the taxes on during the marriage?

[BobKamman]

That's not a tax question.  No one here is a Texas lawyer.