You and your spouse must file a joint married tax return to take advantage of this option.
What Is a Qualified Joint Venture?
The IRS recognizes that a business owned by 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 makes it easier for spouses to file tax returns without having to file a complicated partnership return. The IRS calls this option a qualified joint venture.
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 shows 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. Both spouses in a qualified joint venture must pay self-employment taxes: 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 the 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. Both spouses receive Social Security/Medicare credits for the business profits they claim. 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 tax year. This means you must 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.
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. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin as of 2022. 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 owned 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. 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.
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. 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.
