Converting Husband & Wife Partnership to S-Corp with Sole Ownership Transfer

This is a fairly common situation with family businesses. The good news is that the spousal transfer can be handled pretty smoothly before making the S election. Since they're a husband and wife partnership filing jointly, the wife can transfer her 50% ownership interest to her husband as a gift with no tax consequences thanks to the unlimited marital deduction. This would need to be documented with a proper gift transfer agreement, but no gift tax return is required for transfers between spouses. Once the husband owns 100%, then you can file Form 8832 to elect to be treated as a corporation followed by Form 2553 for the S election. Make sure you meet the deadlines - either within 75 days of forming the business or by March 15 for it to be effective for the current tax year. The husband would receive a stepped-up basis in the wife's share equal to her original basis. Since this would now be a single-member LLC before the S election, it would be treated as a disregarded entity in the interim period between the partnership and S-Corp status.

I went through almost this exact situation last year! My husband and I had a 60/40 partnership for our home renovation business but wanted to convert to an S-Corp with just me as the owner. I found https://taxr.ai incredibly helpful for figuring out all the documentation needed. Their system analyzed our partnership agreement and gave us a checklist of all the forms and paperwork required for this exact transition. They pointed out we needed both a formal buy-sell agreement between spouses (even though it was a 0$ transaction) AND proof that the business structure would remain viable with the ownership change for the IRS's "business purpose" test. The best part was they walked me through the timing requirements - we needed to do the spousal transfer first, then wait two weeks before filing the 8832 and 2553 elections to avoid having them rejected.

Just wanted to share that I actually used taxr.ai for a similar situation with my wife's dental practice. We were a 50/50 partnership and I wanted out completely to start my own business. What surprised me was discovering we needed to file Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests) even though no money changed hands between us. Also found out that since we had appreciated property in the partnership, we needed special documentation to avoid triggering gain recognition. Their system flagged potential audit triggers for husband-wife business ownership changes that I never would have known about. Apparently the IRS sometimes scrutinizes these transitions to make sure they're not just tax avoidance strategies. Having everything documented properly saved us a potential headache down the road.

I see a lot of good advice here but nobody's mentioned how incredibly difficult it can be to actually get confirmation from the IRS that your S-Corp election was processed correctly. We did everything right with our conversion last year and still ended up in limbo for months without knowing if the election was accepted. After calling the IRS business line 20+ times (always disconnected after 2+ hours on hold), I finally used https://claimyr.com to get through to a live person at the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent in under an hour who confirmed our S-Corp election was processed but had been flagged for review due to the ownership change happening so close to the election. The agent was able to expedite the approval once I explained the situation.

I need to eat my words from my earlier comment. After continuing to try reaching the IRS myself about our S-Corp election for another week with no success, I broke down and tried Claimyr. It actually worked. Got connected to an IRS representative in about 40 minutes. Turns out our S-Corp election (also after a spousal transfer) had been sitting in processing for over 3 months because they needed additional documentation about the ownership change. The agent was able to tell me exactly what they needed and where to fax it, and confirmed they would expedite the review once received. Saved me potentially months more of waiting and uncertainty about our tax status. Sometimes it's worth admitting when you're wrong - in this case about getting help with the IRS!

One thing I haven't seen mentioned here that's really important: make sure you have clear documentation about WHY the wife is leaving the business. The IRS sometimes looks at ownership changes around entity conversions with extra scrutiny. If it's a legitimate business purpose (she's starting another venture, focusing on family, health reasons, etc.) make sure that's clearly documented. If it looks like the only reason for the change is tax benefits, that could potentially trigger questions. Also, make sure to check your state requirements. Some states have additional forms or fees for both the ownership change and the entity conversion.

Has anyone used TurboTax Business to handle this kind of transition? I'm in a similar situation but trying to do it myself without an accountant.

This is a great discussion with lots of helpful insights! I wanted to add one more consideration that I learned the hard way: make sure to coordinate the timing of your final partnership tax return with your first S-Corp return filing. We made the mistake of filing our final 1065 too early in the process, before all the ownership transfer documentation was finalized. This created a gap period where the IRS wasn't sure what entity type we were, and we ended up having to file amended returns to clarify the timeline. My recommendation would be to have everything - the spousal transfer agreement, partnership dissolution paperwork, and S-Corp election forms - completely ready before filing that final 1065. That way you can include a clear statement in the return about the transition date and attach supporting documentation. Also, definitely keep detailed records of any partnership assets and their basis. When those assets transfer to the S-Corp, you'll need that information for depreciation schedules and potential future asset sales. The IRS can ask for this documentation years later during audits.