What Is a Qualified Joint Venture for Spouses?
Definition and Examples of a Qualified Joint Venture for Spouses
A qualified joint venture (QVC) is a tax-filing option designed for spouses, including same-sex married couples, who go into business together as partnerships. The individuals in a QJV can separate or split the profits or losses of a partnership business when they each file a separate Schedule C for their portion of the business's income and expenses.
Spouses must file joint married tax returns to take advantage of this option. A partnership is the only kind of business that can be treated as a QJV. Sole proprietors can't do so because, by definition, only one individual owns and runs this type of business.
What Is a Qualified Joint Venture?
The IRS recognizes that a business owned by two spouses is unique, so it made an exception for this type of entity beginning in tax year 2007. The Small Business and Work Opportunity Tax Act of 2007 makes it easier for two spouses to file tax returns without having to file a complicated partnership return. The IRS calls this a Qualified Joint Venture (QJV).
A QJV is not a legal business type. It doesn't require any kind of formation at the state level. It is a concept developed by the IRS to allow spouse/owners of a partnership business to file their business taxes as sole proprietors when they meet certain requirements.
- Acronym: QVC
How a Qualified Joint Venture Works
A QVC requires that you must complete two Schedule Cs, one for each spouse. Each Schedule C would show that individual's share of income and expenses.
Each Schedule C would show $50,000 in income if your spousal business had a net income of $100,000, and if the partnership agreement designates that all income be split 50/50 between spouses.
Complete one Schedule C for the business to get the net income total, then use that Schedule C to divide all the line items between spouses according to their percentage shares of the business.
Don't file the combined Schedule C with the IRS. It will just confuse things and it will delay processing of your return.
The husband and wife in a qualified joint venture must both pay self-employment taxes, which are Social Security and Medicare for self-employed business owners. The self-employment tax for each spouse would be based on that person's share of the net income from the business. Each spouse should also file their own Schedule SE to calculate their self-employment tax liability.
Advantages of a Qualified Joint Venture
Electing to be taxed as a QJV offers a few advantages if you meet eligibility requirements.
It's less expensive and easier to file two Schedule C business tax forms than to file a complicated partnership income tax return for your business. A partnership must file its own business tax return, which is an information return, then divide the income between the partners for tax purposes. Income passes down to the partners to be taxed on their personal returns.
The process of filing a partnership tax return can mean hiring a tax professional, even for a simple two-person partnership, and it will make tax preparation more expensive.
Both spouses receive Social Security/Medicare credits for business profits. Although spouses must pay self-employment taxes on their share of the profits, these taxes add to each spouse's Social Security/Medicare eligibility and benefits.
Requirements for a Qualified Business Venture
Your business is eligible to file business taxes as a Qualified Joint Venture (QJV) if you meet certain criteria:
- Your business can't be a corporation or an S corporation.
- You and your spouse must be the only people in the business.
- You must file a joint married tax return.
- You must both "materially participate" in the business during the year. This means you both actively work in the business.
- Both spouses must agree not to be treated as a partnership, and both must file a Schedule C. One spouse can't file a Schedule C if the other files a partnership tax return.
It's not necessary to file anything with the IRS to make a QJV election. Simply file two separate Schedule C forms and add them to your other income on your joint married tax return if you meet all the eligibility criteria.
QJVs in Community Property States
The IRS specifically excludes "state entities" or LLCs from electing to file business taxes as qualified joint ventures, but there's a loophole in this restriction: LLCs in community property states can do so.
Community property is a type of joint ownership of assets. Nine states provide for this type of ownership between spouses. Business earnings can be included as being jointly owed 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 the same as it would for a partnership owned by two spouses.
The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
A disregarded entity is a single-owner LLC that files its business income tax return as a sole proprietorship on a Schedule C. An LLC can only be treated as a QJV in community property states, so only an LLC owned by two spouses can be treated as two disregarded entities in these states.
You don't have to do anything to be a disregarded entity. It's just a tax term and status for IRS purposes.
What If You File but You're Not Eligible?
You'll have to file an amended tax return if you incorrectly filed as a qualified joint venture when you weren't eligible to do so. Your new tax form would have to be a partnership tax return. Consult with a tax professional for help with this filing if you find yourself in this situation.
- Spouses who operate partnerships together can elect to file as qualified joint ventures (QJVs) rather than file the more complex and expensive partnership tax return.
- This special tax treatment was introduced under the terms of the Small Business and Work Opportunity Tax Act of 2007.
- Spouses must file joint married returns to be eligible to file their tax returns as QJVs.
- This tax provision applies only to partnerships, not LLCs, except in community property states.
NOTE: This article is a general discussion of the qualified joint venture. It is not intended as tax or legal advice. Each business situation is unique, and there might be limitations and restrictions on your ability to file business taxes as a qualified joint venture. Consult with your tax professional before you file.