A husband-wife owned business is unique in many respects ? a reality that even the Internal Revenue Service (IRS) recognizes, and created a tax filing exception for this specific type of business. The IRS permits a husband-wife owned business to file a joint marital tax return as a Qualified Joint Venture (QJV) with their personal return rather than a separate partnership return. By doing so, the IRS simplified tax filing options for spousal businesses that meet certain criteria.
At the outset it is important to note that the QJV is not a separate state-created business entity, such as a corporation or limited liability company. Rather, the QJV describes a specific tax application in which a husband and wife who jointly operate and participate in a business may qualify to file as a sole proprietorship rather than a partnership. This saves the qualifying QJV from filing partnership taxes with individual K-1 forms.
In order to qualify as a QJV, the husband and wife must own and operate a business that is not a corporation or limited liability partnership. Typically, the husband-wife business is a partnership. The IRS specifically excludes all state law entities, so if the company is already operating as a limited liability company (LLC), the election for QJV is not available in Colorado. Qualification requires the husband and wife to share items of income, gains, losses, deductions and credit/debt in accordance with each spouse’s interest in the business. The husband and wife must be the only partners and must both materially participate (defined by the IRS as “regular, continuous and substantial basis” and meet the seven tests used by the IRS to determine material participation each year) in the business operations. If the husband and wife business qualifies, both spouses file separate Schedule C for business income forms with their tax return showing each spouse’s share of the income (established in a partnership agreement), deductions and profits or loss. Both spouses also file a separate Schedule SE, setting forth each spouse’s self-employment income. The spouses must also file a joint return with these separate schedules attached. If the business filed a partnership tax return in the previous year, the partnership is considered to have ended at the end of the previous year.
As illustration, consider that Don and Jill are a married couple operating a financial planning business in which Don, who is the licensed planner, has a 70% interest and Jill, who performs all the administrative functions has a 30% interest. Don and Jill file a joint return, but Don files a Schedule C showing his 70% share of income, deductions and net income/loss and Jill files a Schedule C showing her 30% share of income, deductions and net income/loss. Don and Jill each file a Schedule SE showing their respective share of self-employment taxes (Social Security and Medicare).
The benefits to filing taxes as a QJV include the cost savings in time and money as filing is easier and less expensive to file than a typical partnership return and both spouses get credit for Social Security and Medicare payments. For example, if Don and Jill earned business profits of $100,000, Don earns credit for $70,000 in income and Jill earns credit for $30,000 in income toward Social Security and Medicare.
SMART TIP: Not every husband-wife business is appropriate for a QJV. There are many other business forms, which might suit your particular circumstances. If you are interested in exploring the option of becoming a Qualified Joint Venture or any other business entity form, we encourage you to seek professional legal and tax advice to ensure compliance with all laws and regulations.