Can My Husband-Wife Business Elect to be Qualified Joint Venture?
A husband-wife business that is not a corporation may be able to elect to be a Qualified Joint Venture (QJV). As a QJV the business can take advantage of filing two Schedule C forms as part of the couple's personal tax return, instead of the more complicated partnership return.
What is a Qualified Joint Venture (QJV)?
A qualified joint venture is a special type of tax filing approved by the IRS. It allows a husband/wife business that is not a corporation to file separate Schedule C forms for their joint participation in the business. Since most LLC's don't qualify (see below), this means the two spouses are working together as sole partners in a partnership.
Details on How the Qualified Joint Venture Works
To be able to file business taxes as a Qualified Joint Venture, here are the requirements:
- The spouses must be the only owners of the business.
- The spouses must share the items of income, gain, loss, deduction, and credit in accordance with each spouse's interest in the business.
- The spouses must file a joint tax return (not married filing separately).
- The spouses must be the only partners and both spouses must materially participate in the business. The respective shares in the business are determined by the partnership agreement.
- Both spouses file a separate Schedule C, showing that person's share of the income, deductions, and any profits/losses. No partnership tax return is filed.
- Both spouses also file a separate Schedule SE, showing that person's self-employment income.
- The election for a qualified joint venture stays in effect as long as the spouses meet the requirements.
- If the business return was filed in the previous year as a partnership, the partnership is considered to have ended at the end of the previous year.
What's the Advantage of the Qualified Joint Venture?
It is a lot cheaper, less complicated, and it takes less time to file taxes with a Schedule C through your personal tax return than to file a partnership tax return.
Can a Husband-Wife LLC be a Qualified Joint Venture?
The IRS states specifically that an LLC cannot elect to be a QJV. But the IRS says that a husband-wife LLC in a community property state can make the decision to be taxed as either a partnership or a Qualified Joint Venture.
What are the Community Property States?
All states have laws related to division of property, most commonly in a divorce; each state is either a "community property" or "equitable distribution" state. In community property states, all property acquired during the marriage is divided equally. Only nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
How Does a QJV Work for Same-sex Spouses?
Since June 2015, same-sex marriage is legal in all 50 states. The IRS says:
Spouses that wholly own and operate an unincorporated business and that meet certain other requirements may avoid Federal partnership tax treatment by electing to be a Qualified Joint Venture.
It's not clear how the various states will treat the QJV business form. Read this article on same-sex couples filing state tax returns.
Before you attempt to file your business taxes as a QJV, be sure to check state laws, which might have changed or be different for same-sex spouses.
What Does "Materially Participate" Mean?
The IRS says that someone materially participates in business activities if he or she does so on a "regular, continuous, and substantial basis." There are seven specific things the IRS looks at, including how many hours the person works, whether others work more than this person, and how many years the person has been working a substantial amount of time in the business.
How Do We Elect to Be a QJV?
You don't need to send in an application for this election. Basically, you just divide up the profits or losses from the business and each spouse files a separate Schedule C showing his/her share. For example, if the business had a profit of $15,000 in 2009, and the spouses shared equally in the partnership, each would file a Schedule C showing 50% of the income and expenses and a profit of $7,500.
How Do We Complete the Two Schedule C's?
If you are doing your own business taxes, you might want to create a Schedule C to get the total net income for the year. The IRS wants you to divide up each item of revenue and expenses using the percentage of ownership, including vehicle expenses and the home business space section. It doesn't matter who did the driving or how much office space each spouse had; if there are two home business spaces, add them together then split according to your share.
Don't Forget Self-employment Tax!
Self-employed business owners must pay self-employment tax (Social Security and Medicare tax) on the earnings of their business. Each spouse will need to complete a Schedule SE for his or her share of self-employment taxes. Separating the tax between the two spouses means that each will get credit for his or her own Social Security benefits.
What Tax ID Numbers Do We Use?
Each spouse can use their own Social Security number or other personal Tax ID number for their Schedule C. You don't need to get a Employer ID Number (EIN) just for this purpose, but you might need an EIN for other reasons. if the partnership has an EIN, one partner can use that number, but you might want to check with your tax preparer on this. Be sure to use Social Security Numbers on the Schedule SE forms to be sure the income is credited to each spouse personally.
Can We Create These Schedule C's on Tax Preparation Software?
You should be able to use one of the major tax preparation software companies to do two Schedule C's. Check to make sure the business version you are using can do this. Check this article on the current business tax preparation software versions for more details.
What's the Difference Between a QJV and a Joint Venture?
A joint venture is a project involving two or more businesses who want to work together on a short-term project or longer-term venture. It has no relationship to a qualified joint venture.
Disclaimer: I am not a CPA or qualified tax adviser or preparer. I have provided this general information to give you an understanding of this tax situation and so you can take it to your tax adviser. Please check with your tax preparer or tax adviser before making any tax decisions or filing a specific tax return.
For More Information, read this IRS article:
Election for Husband and Wife Unincorporated Businesses