What Is a Qualified Joint Venture for Spouses in Business?
Frequently Asked Questions
The IRS recognizes that a business owned by two spouses is unique, so it has made an exception for this type of business, to make it easier for the two spouses to file tax returns without having to file a complicated partnership tax return. The IRS calls this business type a Qualified Joint Venture (QJV).
A QJV is designed for two spouses [husband/wife or same-sex married couples] in business together. By definition, they can't be a sole proprietor, because that's just one person in a business. But the two people in a QJV can separate the profits (or losses) of a partnership business and each person can file a Schedule C for their portion of the income and expenses. They must file a married and joint tax return to do this. The only kind of business that can be a QJV is a partnership. Read on for some of the most frequently asked questions about Qualified Joint Ventures.
A QJV is not a legal business type. It is a concept developed by the IRS to allow spouse-owners of a partnership business that meet certain requirements to file their business taxes as sole proprietors, using two Schedule C forms.
What Is the Benefit of Filing Business Taxes as a Qualified Joint Venture?
If you meet eligibility requirements to elect to be taxed as a QJV, there are several benefits:
- It's less expensive and easier to file two Schedule C business tax forms than to file a complicated partnership income tax return for the business. A partnership must file its own business tax return and then divide the income between the partners for tax purposes. Even for a simple two-person partnership, this process can mean hiring a tax preparer.
- Both spouses receive Social Security/Medicare credits for business profits. The spouses will need to pay self-employment taxes (Social Security/Medicare) on their share of the profits, but these taxes add to each spouse's Social Security/Medicare eligibility and benefits.
Your business, if owned by two spouses, may be eligible to file business taxes as a Qualified Joint Venture (QJV) if you meet certain criteria:
- Your business may not be a corporation or an S corporation.
- The spouses must be the only people in the business.
- They must file a joint tax return.
- They must both materially participate in the business during the year (in other words, both spouses are actively working in the business).
- Both spouses must agree not to be treated as a partnership (in other words, both must file a Schedule C). If one spouse files a partnership tax return, the other can't file a Schedule C.
The IRS specifically excludes "state entities" (that is, LLCs) from electing to file business taxes as a Qualified Joint Venture. But there is one "loophole" in this restriction: LLCs in community property states may file as a QJV.
Community property is a type of joint ownership of assets. Several states allow married couples this ownership. Business earnings may be able to be included as joint ownership in these states if the earnings meet other criteria. This principle of joint ownership allows the IRS to treat joint ownership of an LLC by two spouses as the same as for a partnership owned by two spouses.
The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
You actually will need to complete two Schedule C's, one for each spouse. Each Schedule C should show that person's share of income and expenses.
For example, if your husband-wife business had a net income of $100,000, and the partnership agreement designates that all income be split 50/50 between husband and wife, each Schedule C would show $50,000 in income.
If you are doing your own taxes, complete one Schedule C for the business to get the net income total. Then use that Schedule C to divide up all of the line items between the spouses, according to their percentage share of the business. (Don't file the combined Schedule C; it will only confuse the IRS.)
The husband and wife in a qualified joint venture are both eligible for and must pay self-employment taxes (Social Security and Medicare for self-employed business owners). The self-employment tax for each person is based on that person's share of the net income from the business.
In the example above, each spouse would pay self-employment tax on $50,000 of the business net income. Each spouse should file a Schedule SE to calculate their self-employment tax liability.
If you file as a qualified joint venture incorrectly when you were not eligible to do so, you will need to file an amended tax return for that year. The new tax form will need to be a partnership tax return. If you think you have made a mistake in the filing as a qualified joint venture, see your tax professional for help with this filing.
A disregarded entity is a single-owner LLC that files its business income tax return as a sole proprietorship on a Schedule C. Since an LLC can only be treated as a QJV in community property states, in these states only an LLC owned by two spouses can be treated as two disregarded entities.
There is nothing you need to do to be a disregarded entity; it's just a tax status for IRS purposes.
This article is a general discussion of the qualified joint venture. It is not intended to be tax or legal advice. Each business situation is unique, and there may be limitations and restrictions on your ability to file business taxes as a qualified joint venture. Before you file, consult with your tax professional.