Qualified Joint Venture Election for A Husband and Wife Co-Owned Proprietorship
Qualified Joint Venture Election Available for Married Couples as Co-sole proprietors
An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes.
For tax years 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 husband and wife who file a joint return, can elect not to be treated as a partnership for Federal tax purposes.
In other words, instead of being required to file a partnership return, Form 1065, and deal with the recordkeeping requirements of a partnership, each spouse may file their own separate Schedule C as a sole proprietor as well as their own separate Schedule SE.
As a Qualified Joint Venture (QJV), each spouse separately reports a share of all of the businesses’ items of income, gain, loss, deduction, and credit in accordance with their percentage interest in the business.
Under the QJV election, both spouses will receive credit for social security and Medicare coverage purposes.
Definition of a Qualified Joint Venture
A qualified joint venture is a joint venture that conducts a trade or business where:
- The only members of the joint venture are a husband and wife who file a joint return.
- Both spouses materially participate in the trade or business, and
- both spouses elect not to be treated as a partnership.
The meaning of “material participation” is the same as under the passive activity loss rules in section 469(h) and the corresponding regulations (see Publication 925, Passive Activity and At-Risk Rules).
A qualified joint venture, for purposes of this provision, includes only unincorporated businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity such as a limited partnership or a limited liability company.
Limited Liability Companies
If you and your spouse own and operate a business through a limited liability company in a non-community property state, you do NOT qualify for the Qualified Joint Venture election.
However, if you and your spouse live in a community property state, you do qualify for the Qualified Joint Venture election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.
Community Property States
The IRS specifically states that an LLC may not elect to be treated as a qualified joint venture. However, for community property states, under Rev. Proc. 2002-69, a husband and wife owned LLC may receive essentially the same tax treatment as would otherwise be available with a qualified joint venture election.
In other words, in community property states, a married couple can elect to be taxed as a partnership or a sole proprietorship (referred to as a disregarded entity) where each spouse is a co-sole proprietor and files their own separate Schedule C and Schedule SE.
As stated earlier, the income and expenses of the business must be divided according to the percentage interest each spouse has in the business and each spouse's share of these items must be reported separately on their own Schedule C.
Community Property States:
- New Mexico
NOTE: Joint ownership of property that is not a trade or business does not qualify for the election. The spouses must share the items of income, gain, loss, deduction, and credit in accordance with each spouse's interest in the business
Rental Real Estate Income:
Except as provided in section 469(c)(7), rental real estate income or loss generally is passive under section 469, even if the material participation rules are satisfied, and filing as a qualified joint venture will not alter the character of passive income or loss.
How a Husband and Wife Make the Election to be Treated as a Qualified Joint Venture
Spouses make the election by filing a jointly filed Form 1040 as well as filing their own separately prepared:
- Schedule C, Profit or Loss From Business, or
- Schedule F (Form 1040), Profit or Loss From Farming, or
- Form 4835, Farm Rental Income and Expenses, and
- Schedule SE, Self-Employment Tax
For example, if you and your spouse each own a 50% interest in the business, you each must file your own Schedule C to report 50% of the income and expenses of the business. In addition, you both would file your own separate Schedule SE, Self-Employment Tax, so that you each get credit for social security and Medicare purposes.
Employer Identification Number
In general, spouses do not need an Employer Identification Number (EIN) for the qualified joint venture. Spouses electing qualified joint venture status are treated as sole proprietors for Federal tax purposes.
Therefore, the rules for sole proprietors applies, which means, an EIN is not required unless the sole proprietorship is required to file excise, employment, alcohol, tobacco, or firearms returns. If an EIN is required, the filing spouse should complete a Form SS-4 and request an EIN as a sole proprietor. You can apply for an EIN online.
Tip: How to handle an IRS notice:
After you have made the election to file as a qualified joint venture, if you get a notice from the IRS requesting that you file Form 1065, which is for a partnership, the IRS recommends that you contact the toll-free number on the notice and advise the telephone assistor that you reported the income on your jointly-filed individual income tax return as a qualified joint venture. Alternatively, you may write to the address shown on the notice and provide the same information.