Prior to 2007, only married taxpayers who lived in a community property state were allowed to treat their business as a sole proprietorship. Now, all married taxpayers have this option. To take advantage of this new rule, you and your spouse must be the only owners of the business (no kids or outsiders allowed), and both of you must materially participate in running the business.

If you meet these requirements and want to have your business treated as a sole proprietorship, you must file two separate IRS Schedule C's -- with each of you reporting your individual share of the business's income or loss. Going this route also means that you must each file a separate self-employment tax form (Schedule SE), reporting and paying Social Security and Medicare taxes on your separate share of the business income.