Learn more about the Qualified Business Income Deduction and whether you qualify for big tax…
You and your spouse have taken the step to start a business together, and you've got most of the details laid out. However, the rules on how to file your taxes are confusing — should one party take sole proprietorship of the business? Should you file as a partnership, which requires added paperwork and costs? If you and your spouse own and operate a business together, you can file as a qualified joint venture, but what does that mean? To help you understand this option, our small business accounting firm is sharing the information you need to know.
What Is a Qualified Joint Venture?
Prior to 2007, married couples who owned a business together were forced to file as a partnership on their taxes which required Form 1065, forms related to how the business was divided, and additional costs. To avoid this, most couples would have one spouse file as a sole proprietorship. This means that only one person would report income and expenses on the joint tax return, and also they would be the only person paying estimated and annual taxes. This may not sound serious, but this means only one person is contributing to Medicare and Social Security.
In 2007, the IRS created the qualified joint venture, which allowed married couples to both file as a sole proprietorship, allowing them to report income and expenses more accurately, pay taxes in a way that was beneficial to the couple, and eliminate excess paperwork and fees. Both spouses will complete a Schedule C (business profits or losses) and Schedule SE (self-employment tax) and will file these with their 1040, accurately reporting their income in a way that reflects each party's interest in the business.
Requirements to File as a Qualified Joint Venture
In order for a married couple to file as a qualified joint venture, they can not already have established themselves as a partnership, a limited liability company, or other business entity. Additional requirements include:
- There can be no other owners of the business besides the two people who are legally married.
- Both spouses are active participants in the business.
- Both spouses are in agreement to operate and be treated as a joint venture rather than a partnership.
It is important to note that while "husband and wife" were originally used when the guidelines were written, they now apply to anyone in a legal marriage.
Benefits and Drawbacks of Filing as a Qualified Joint Venture
Now that you have a better idea of what a qualified joint venture is, let's look at the pros and cons of choosing this option.
There are two key benefits to filing as a qualified joint venture:
- It's much easier to file as a sole proprietorship than a partnership, and in this filing, both couples are filing as sole proprietors. There are no added returns or the need for a K-1 form or a Form 1065. Instead, both spouses fill out the Schedule C and SE for income and taxes paid, respectively.
- Both parties are recognized as paying self-employment taxes. If only one spouse is showing that they are paying into Social Security, this will greatly impact the retirement benefits of the other spouse. Through a joint venture, both parties will receive the fair benefits their entitled to.
There are also two key drawbacks to choosing to operate as a qualified joint venture:
- Because this is the same operating entity as a sole proprietorship, this means that both parties have personal liability for the actions of the business. The business isn't a separate legal entity from the business, as it is in a limited liability company or corporation, thus, you may have to pay for business debts using personal funds or property.
- Sole proprietorships, and thus, qualified joint ventures end up paying more in taxes, particularly self-employment taxes.