Qualified Joint Venture Election for Married Business Co-Owners
The Small Business and Work Opportunity Tax Act of 2007 (Public Law 110 – 28) allows a qualified joint venture for married spouses, allowing them to elect not to be treated as a partnership. To avoid the filing and recordkeeping requirements of the partnership, many married co-owners reported their income on a Schedule C, Profit or Loss from Business in the name of 1 spouse. However, in that case, Social Security and Medicare benefits will be less than if both spouses filed as partners or if both filed a Schedule C. However, tax law, in the absence of any other election, generally treats 2 or more people who co-own a business as partners, which entails filing a partnership return (Form 1065, U. S. Return Of Partnership Income) as well as requiring each spouse to file an individual return based on a Schedule K-1, Partner's Share of Income, Deductions, Credits, etc. from the partnership. Another major problem with the non-filing spouse or the employee-spouse is that allowable retirement contributions will be significantly less than if both spouses were treated as self-employed, since self-employed retirement accounts have higher contribution limits. So this new election will simplify taxes for a married couple running a business, while also providing both spouses with potentially better Social Security and Medicare benefits, and it will allow each spouse to contribute much more to retirement accounts. For instance, if each spouse had a solo 401(k) plan, then each can contribute as an employee up to $19,000 (as of 2019); each spouse who is at least 50 years of age can contribute an additional $6,000 as an employee. Additionally, each spouse, regardless of age, will be able to contribute another 20% of their profits as an employer.
Other partnership expenses can also be avoided. Certified public accountants generally charge $1,000 or more for filing Form 1065, U. S. Return Of Partnership Income, and any required informational returns for the state, and sending Schedule K-1's to each spouse. So electing to classify the business as a joint venture allows spouses to file Schedule C to report their share of income, gains, losses, and deductions with respect to their ownership interest in the joint-venture rather than filing Schedule E, Supplemental Income and Loss that would be required to show partnership income on Form 1040.
The qualified joint venture is not a legal entity, but simply a classification for tax purposes. The election for the qualified joint venture is made simply by both spouses filing a Schedule C or a Schedule F, Profit or Loss from Farming for farming and a separate Schedule SE, Self-Employment Tax to figure self-employment tax. Any previous partnership will terminate at the end of the taxable year preceding the election.
The qualified joint venture election has several requirements:
- only the spouses own the business
- they file jointly
- both spouses elect not to be treated as a partnership
- both materially participate in the business; and
- the business is not classified as another entity under state law, such as a partnership or limited liability company.
Spouses electing the qualified joint venture will not be taxed as a partnership for federal tax purposes and will not have to file Form 1065. However, a percentage interest in the business must be established for both spouses, so that income, gains, deductions, losses, and credits, and determining net earnings from self-employment can be apportioned appropriately. Income and deductions are generally calculated on Schedule C.
However, if 1 spouse actually works as an employee for the other spouse, then the employer spouse must pay Social Security and Medicare taxes, but not FUTA tax, for the employee's spouse.
The material participation test is the same as under the passive activity loss rules. Although real estate rental property can be operated as a qualified joint venture, the rental income or loss is still passive, even if the material participation rules are satisfied.
If the spouses operate a rental real estate business, then they may not be subject to self-employment tax and should indicate so by checking the box in Line 1 of Schedule C and not filing Schedule SE.
Because the spouses are treated as sole proprietors, they do not need an employer identification number (EIN) unless they are required to file excise, employment, alcohol, tobacco, or firearms returns, in which case Form SS-4, Application for Employer Identification Number should be filed to request an EIN as a sole proprietor.
If one of the spouses already had an EIN for the partnership, then that cannot be used for the joint venture, since the IRS already associates that EIN for the previous partnership. If the joint-venture has employees, then that information can be reported using the EIN of one of the spouse's sole proprietorship. If employment taxes have already been deposited or paid under the partnership EIN, then the spouse may be considered a successor employer of the employee for determining whether the wages have reached the wage base limits for Social Security and federal unemployment.
Although, technically, the joint-venture election can only be revoked with permission of the IRS, as a practical matter, the joint-venture terminates when the requirements are no longer being satisfied. If the joint-venture requirements are not satisfied for a year, then it will be necessary to make a new election if the spouses want to be treated as a qualified joint venture again.