If you and your spouse are operating a business together, you should understand the advantages of being considered a qualified joint venture. This type of business entity can simplify your record keeping and tax filings.
Forming a qualified joint venture
Created to allow a simplified tax-filing procedure for a married couple operating a business, a qualified joint venture, as opposed to a general joint venture, is a special type of business partnership that can exist if the only two partners are spouses. It also alleviates the couple from having to maintain the records required of a partnership.
It is not uncommon for the Internal Revenue Service (IRS) to treat one type of business as if it were another type of business. For example, a limited liability company (LLC) can choose to be treated as if it were a corporation. With a qualified joint venture, the IRS treats a spousal partnership as if each spouse were operating a separate sole proprietorship.
To create a qualified joint venture, you and your spouse simply start a business together, which, because two people own the business, legally makes it a general partnership. You do not form a limited partnership, limited liability partnership, limited liability limited partnership, limited liability company (LLC), or a corporation. With a limited exception relating to LLCs, if you form any of these other types of entities, your business is not a qualified joint venture.
In most cases, if the spouses form an LLC, they need to file either as a partnership or as a corporation. However, if the LLC was formed in a community property state, the spouses may file as a qualified joint venture, in which case you file your federal taxes as indicated below.
Requirements for a qualified joint venture
A partnership is formed when two or more persons operate a business together, unless they form a limited partnership, limited liability company (LLC), or corporation. The IRS requires a partnership to file a Return of Partnership Income (Form 1065), which indicates the amount of profit allocated to each partner, who then reports their share of the profit on their individual income tax return.
However, a business that is a qualified joint venture avoids being required to file a partnership tax return. Instead, the spouses simply indicate the profit on their joint income tax return.
In order to qualify as a qualified joint venture, the business must meet the following requirements:
- The partners must be married to each other.
- Each spouse must materially participate in the operation of the business.
- There may be no partners other than the two spouses.
- The spouses must share profits or losses in the proportion of each spouse's interest in the business.
- The spouses must file a joint income tax return.
- If the business has any employees, one of the spouses must be designated as being responsible for paying and reporting the employees' withholding taxes.
Tax filing for a qualified joint venture
Unlike an LLC choosing to be treated as a corporation, there is no IRS form to be filed to elect qualified joint venture status. Instead, the spouses file a joint income tax return as if each were operating a separate business.
If qualified joint venture status is used, the couple files the following federal tax forms:
- U.S. Individual Income Tax Return (Form 1040), with the designation that it is a joint return.
- Each spouse prepares a separate Profit or Loss From Business (Sole Proprietorship) (Form 1040, Schedule C), indicating the spouse's share of the profit. If your business relates to farming, you may need to file Profit or Loss From Farming (Form 1040, Schedule F) or Farm Rental Income and Expenses (Form 4835).
- Each spouse prepares a separate Self Employment Tax (Form 1040, Schedule SE) based on the spouse's share of the profit. This gives each of you credit for Social Security and Medicare.
The spouses each use their own Social Security numbers, unless the business has one or more employees, in which case the business must obtain an employer identification number (EIN). An EIN may also be required for certain types of businesses that are required to file tax returns relating to excise tax or that deal in alcohol, tobacco, and firearms.
You and your spouse can simplify your business tax filing by taking advantage of the qualified joint venture. However, you should compare the income and self-employment taxes that will be due with other taxation options. Depending upon your situation, the tax liability might be lower if you have one spouse as the owner and the other as an employee, or if you form an LLC or a corporation.