Taxes can be confusing, even for entrepreneurs and seasoned businesspeople. One question that appears often for married couples who share a business is whether they can file as a qualified joint venture. The IRS lists three elements when defining this type of venture. If a married couple satisfies all three elements, then filing as a qualified joint venture should be possible. It is not always the best decision, though.
The Requirements for a Married Couple to File as a Qualified Joint Venture
A married couple must meet several requirements. They include the fact that only the two people legally married can be owners of the business (the business cannot have other owners), both spouses participate actively in the venture, and both agree to treat it as a joint venture and not a partnership.
The couple must also not have previously designated the business as a limited liability company, partnership, or other business entity.
The Meaning of Qualified Joint Venture
A qualified joint venture is the married couple version of a sole proprietorship. In fact, before the IRS creation of qualified joint ventures in 2007, many married couples chose for one spouse to file as a sole proprietorship. This was problematic because only one of the people was paying Social Security and Medicare taxes. If they chose another route than having one person file as a sole proprietor, it was usually to file as a partnership. This required Form 1065 with more hassle and costs.
A qualified joint venture enables both spouses to file as a sole proprietorship. That facilitates more accurate reporting of the business situation and tax picture. Both people complete a separate Schedule C and Schedule SE with their 1040.
As the IRS explains, spouses with qualified joint venture status share business income, gain, loss, deduction, and credit. They do this according to their share of interest in the business. The IRS treats them as sole proprietors for federal tax purposes.
Pros and Cons of Filing as a Qualified Joint Venture
By filing as a qualified joint venture, both spouses pay self-employment taxes and both are eligible for retirement benefits and the other benefits to which they are entitled. The process is much easier than filing as a partnership.
The disadvantages of filing as a qualified joint venture are similar to those of sole proprietorships. For example, there is the fact that both spouses bear personal liability for business actions. If the spouses instead set up an LLC, they would have much more legal protection. Likewise, the taxes for qualified joint ventures can be higher.
In other words, just because a married couple can file as a qualified joint venture does not mean the spouses should. There are likely various ways you could structure your business to maximize your tax benefits and minimize liability issues.
Get Help With Tax Planning and Setting up Your Business
KDK Accountancy Corporation in the Orlando area offers various services such as incorporation, new business advising, accounting, and tax services. Get in touch today at (407) 759-5363 to discuss business tax planning aspects such as a qualified joint venture and its alternatives.