For Federal tax reasons, an unincorporated business jointly held by a married couple is normally classed as a partnership. However, for tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a "qualified joint venture," whose only members are a married couple filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.
Definition of a Qualified Joint Venture
A qualified joint venture is a specific type of business arrangement where a husband and wife jointly own and operate an unincorporated business. The key characteristic of a qualified joint venture is that it is treated as a partnership for federal tax purposes, but it does not have to file a partnership tax return.
A qualified joint venture is one in which (1) the only members of the joint venture are a married couple who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. For the purposes of this section, a qualified joint venture is defined as a business owned and run by spouses as co-owners and not in the name of a state law organization (including a limited partnership or limited liability company) (See below). It is also worth noting that simple joint ownership of property that is not used for a trade or business does not qualify for the election.
The items of revenue, gain, loss, deduction, and credit must be shared by the spouses in proportion to their respective stakes in the firm. The definition of "material participation" is the same as in section 469(h) and the accompanying regulations (see Publication 925, Passive Activity and At-Risk Rules). Except as allowed in section 469(c)(7), rental real estate income or loss is normally passive under section 469, even if the material participation conditions are met, and filing as a qualified joint venture has no effect on the nature of passive income or loss.
Advantages for Married Couples to Make the Election Not to be Treated as a Partnership:
Because a married couple's business is normally classified as a partnership for Federal tax purposes, the spouses must comply with the filing and record keeping obligations imposed on partnerships and their participants. Married co-owners who failed to register as a partnership may have reported on a Schedule C in the name of one spouse, resulting in just one spouse receiving credit for social security and Medicare coverage. Certain married co-owners may avoid filing partnership returns if each spouse separately declares a portion of all of the business's revenue, gain, loss, deduction, and credit.
Additionally, reporting income as a member of a qualified joint venture, there is a particular advantage related to self-employment tax. Normally, self-employment tax is imposed on net earnings from self-employment, which includes income from a sole proprietorship or partnership. However, in the case of a qualified joint venture, each spouse's share of the business's income is not subject to self-employment tax.
This means that the individual spouses can report their respective shares of the business's income on their own individual tax returns without paying self-employment tax on that income. This treatment is possible because the Internal Revenue Service (IRS) considers each spouse to be a sole proprietor, rather than a partnership, for self-employment tax purposes within the context of a qualified joint venture.
It's important to note that this treatment only applies to qualified joint ventures and does not extend to other types of business entities, such as regular partnerships or limited liability companies (LLCs) that elect to be taxed as partnerships.
Duration that the Qualified Joint Venture Election Remains in Effect:
Once made, the election may only be reversed with the IRS's authorization. However, the election is theoretically only valid for as long as the spouses filing as a qualified joint venture continue to complete the filing criteria. If the spouses fail to fulfill the qualified joint venture criteria for a year, a new election will be required for any subsequent year in which the couples meet the qualified joint venture requirements.
What can you do to ensure your business arrangement qualifies as a Joint Venture?
It is advisable to consult with a tax professional or accountant to ensure that you meet the requirements for a qualified joint venture and to accurately report your income in accordance with the tax laws and regulations in effect for the relevant tax year.
At Sabalier Law, I can provide guidance on the specific requirements to help ensure that you meet all the requirements and correctly report your business activity as a qualified joint venture. Additionally, I can provide advice on tax planning strategies that can help you maximize your savings under this arrangement. Be sure to schedule your consultation at your earliest convenience to make the most of your tax planning.