A qualified joint venture (QJV) describes a special tax situation in which a husband and wife jointly running a business that is not a corporation may qualify to file as a sole proprietorship rather than a partnership.
Why The Need for a Qualified Joint Venture?
Spouses owning a business is a unique situation. If the spouses are a partnership, in the past they had to file a partnership tax return. This return is complicated because the partnership must file a return and then each partner must declare his or her part of the income on their personal tax return.
Since spouses usually file a joint return, all of this complexity seems ridiculous. Sometimes just one spouse would fill out the return and claim the income, which meant that the other spouse would not get credit for Social Security and Medicare for that income for the year.
Beginning in 2007, the tax law was changed so that if spouses own a partnership jointly, they may not need to file a partnership tax return.
The Qualified Joint Venture and Same-sex Spouses
Details on How the Qualified Joint Venture Works
The spouses must be the only owners of the business. The business may not be a corporation or an S corporation. Both spouses must elect QJV status.
To qualify, the spouses must share the items of income, gain, loss, deduction, and credit for each spouse's interest in the business.
The spouses must be the only partners and both spouses must materially participate in the business (neither can be just a passive investor).
The election for a qualified joint venture stays in effect as long as the spouses meet the requirements.
You don't need to file an election form for Qualified Joint Venture tax status. The "election" is made by each of the spouses filing a Schedule C. The income, deductions, credits, and net income are divided between the two spouses, to get their part of the net income.
Qualified Joint Ventures from Jointly Owned LLCs
The IRS specifically excludes spouses in a "state law entity" (including a limited liability company or limited liability partnership). So if you have an LLC, you cannot use the qualified joint venture election. There is an exception to this: If you and your spouse co-own an LLC in a community property state, you may be allowed to be a QJV).
Qualified Joint Ventures for Rental Real Estate
If you and your spouse rent real estate (including having an Airbnb-type rental business), you may be able to qualify as a QJV for properties you own. Report rental income on Schedule E, and check the QJV box for each property you want to report this designation for.
QJV Status and Self-employment Tax
Because each spouse files a Schedule C, each must pay self-employment tax (Social Security and Medicare tax) on their Schedule C income. The self-employment tax calculation (on Schedule SE) for each spouse is added to the total tax payable on the couple's joint personal tax return. Of course, each spouse then gets credit for Social Security and Medicare benefits, based on their share of income on their Schedule C.
An Example of How a QJV Works
Sam and Sally own a partnership. Each of them owns 50% of the partnership, so they split this year's profit of $75,000 equally. They elect Qualified Joint Venture tax status by each filing a Schedule C, dividing in half the income, deductions, and credits, and showing a net income of $37,500.
Both Sam and Sally must calculate their self-employment tax on separate Schedule SE's, based on their $37,500 of income. The totals from the two Schedule C's and Schedule SEs are included in their joint tax return.
Other Tax and Legal Issues in the Qualified Joint Venture
Employment Taxes. One of the spouses must be designated to be responsible for reporting and paying employment taxes, including income tax withholding, FICA taxes (Social Security and Medicare), and unemployment taxes, Note that this is a personal responsibility, and failure to pay these taxes can result in individual liability.
Employer ID Number (EIN): Since each spouse in a QJV is treated as a sole proprietor, the IRS says they can use their Social Security Numbers as identifiers unless the EIN is required for other purposes.
Qualified Joint Venture qualifications are complicated. This article is intended to give general information, not tax or legal advice. Check with your tax professional and attorney before you consider taking a QJV election.