Qualified Joint Venture
A qualified joint venture (QJV) can help streamline taxes for spouses who own and run an unincorporated business. While a QJV sounds more like a home shopping network than a tax classification, the overall goal is to solve at least some of the problems that married business partners face at tax time. Read on to learn more about how a QJV might be able to streamline your taxes.
What is a Qualified Joint Venture?
A QJV allows a married couple who are in business together to file as joint sole proprietors of the business instead of as a partnership. In 2007, the IRS added this provision, allowing spouses who own and operate an unincorporated business together to file taxes as a QJV. The general idea was to alleviate the burdensome tax filing requirements often associated with business partnerships by re-classifying a spouse-owned business as a sole proprietorship.
Before the IRS allowed for the qualified joint venture election, spouses who were in business together frequently filed taxes under only one spouse’s name, even though both shared in the profits and losses of the business. While this often saved time and money compared to filing taxes for a partnership, it also meant that only one spouse was receiving credit for Medicare and Social Security contributions.
Requirements for a Qualified Joint Venture
In order to qualify for QJV status, your business must meet these criteria:
- The only members are yourself and your spouse
- A joint tax return (1040) needs to be filed
- Both spouses must participate in the business
- Both spouses must make the QJV election
- The spouses have not formed a legal business entity (LLCs are allowable in a community property state)
Qualified Joint Venture vs LLC
A QJV is a tax designation and not a legal entity like an LLC. This means there are some issues married business owners should be aware of.
- Community Property States
If a married couple forms an LLC in a community property state, they can qualify for the QJV election, as long as they meet the designated requirements. However, if a married couple forms an LLC in a non-community property state, they won’t qualify for QJV election. Only nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) are community property states. This limits married couples who want the asset protection of the LLC, but the tax simplification of a QJV, because in 41 other states, an LLC won’t be permissible.
- Liability Concerns
As previously mentioned, a QJV allows married couples who jointly own a business to file taxes as sole proprietors and skip the paperwork of partnership filings. One of the biggest drawbacks of being a sole proprietor is personal liability risks. As an LLC, your business is a separate entity that offers asset protection among other benefits. A QJV election may help simplify your life come tax time, but it won’t protect you from a lawsuit.
Benefits of a Qualified Joint Venture
There are some practical advantages to choosing to be taxed as a QJV over a partnership.
- Simplified Taxes & Record Keeping
The IRS treats a qualified joint venture as if the couple is a sole proprietorship and not a partnership. This means that the spouses will file a joint Form 1040 along with separate Schedule Cs and Schedule SEs. Before the IRS allowed for QJV election, the same couple would have had to file taxes as a partnership, which involved filing a separate partnership return (Form 1065), and issuing K-1s to themselves, as well as separate 1040s. A QJV election eliminates a lot of the extra paperwork and record keeping.
- Credit for Self-Employment Taxes
Pre-QJV, spouses in a partnership often attempted to save time and money by filing taxes under one spouse’s name, even though both worked for their business. This resulted in one spouse contributing to Social Security and Medicare, while the other did not. With a QJV election, both spouses will receive credit for self-employment contributions.
Qualified Joint Venture Election
The cool thing about electing QJV status is that there is no special IRS form to file. If you are eligible for QJV status, you just need to file the following federal tax forms:
- Form 1040: Spouses make the election on a jointly filed 1040, dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture.
- Schedule C: With the QJV election, each spouse is treated like a sole proprietorship, which means that they’ll need to report how much money they made (or lost) in the business by filing a Schedule C for each spouse.
- Schedule SE: Each spouse also files a separate Schedule SE so that each spouse will get credit for paying into social security and Medicare.
The Bottom Line
The end goal of a QJV is to streamline the tax filing process faced by a small businesses owned by people who are in essence, more than just two regular business partners.
Married couples in business together and who don’t already have an LLC (except in community property states), may consider choosing to file as QJV.