A qualified joint venture (QJV) is a federal tax election for spouses who co-own a business and meet certain criteria. As long as a married couple files a joint tax return, both materially participate in the business, and agree to operate as a QJV, they can elect to be treated as sole proprietors instead of a partnership.
When running a business with your spouse, being taxed as a QJV can have certain advantages over a partnership classification. But before making the decision to elect this status, certain considerations should be made based on your specific business and situation.
Definition and Example of a Qualified Joint Venture
A qualified joint venture is an IRS designation only available to married couples who are the sole proprietor of a business. This option became available beginning in the 2007 tax year and is not a state law entity like a limited liability partnership (LLP) or limited liability company (LLC). Instead, it is a tax election spouses in business together can make in order to be taxed as sole proprietors by the IRS.
- Acronym: QJV
As a hypothetical example, let’s say that Eric and Sarah are married and own a trucking company that is not registered as a state entity. They are the only two partners in the business, file a joint tax return each year, and each own 50% of the company. These factors make the couple eligible to file as a qualified joint venture.
If the couple had a net income of $200,000, they would each file $100,000 on their IRS Form Schedule C. Eric and Sarah would also file separate Schedule SE (Form 1040) to calculate their self-employment taxes based on their reported incomes.
If your QJV has employees, you or your spouse need to obtain a sole proprietor employee identification number (EIN) to pay employment taxes due on wages paid.
How a Qualified Joint Venture Works
The purpose of a QJV is to simplify the tax-filing process for married couples, and this ties directly into how it works.
Filing as a Partnership
It helps to understand how the tax filing procedure would look if the partnership election is made. If that was the case, each spouse would have to file an information return on Form 1065 to report credits, profits, losses, and deductions. Each partner would also need to have a Form Schedule K-1 prepared to report their earnings, losses, and dividends. Note that this is on top of registration and annual reporting fees for incorporation at the state level.
Filing as a Qualified Joint Venture
Filing taxes as a QJV, on the other hand, is typically more straightforward. Here are some key steps in this process:
- The couple files their U.S. individual income tax return (Form 1040), indicating “Married filing jointly.”
- Each spouse then fills out a Schedule C (or Schedule F for farming) to indicate profit and loss from the business.
- Finally, each spouse fills out their own Schedule SE, which is also where another benefit of filing as a QJV comes in.
Schedule SE is the form in which self-employment tax calculations are made, including factoring in FICA taxes (Social Security and Medicare). Due to the complexity of partnership filings, there are some couples who have only one spouse claim all the business income for a tax year.
However, the streamlined process involved with a QJV makes it less complicated for each spouse to fill out their own Schedule SE and receive individual credit for contributions.
QJVs are treated as sole proprietorships, meaning that spouses can use their Social Security numbers to file rather than an EIN. However, an EIN is required for businesses that are required to file returns dealing with excise, employment, firearms, tobacco, or alcohol.
Tax Filing Example
Even if the ownership is not a 50/50 split in a qualified joint venture, filing still works the same. Let’s say a partnership made $100,000 in profit for the year, with Spouse 1 owning 60% of the business while Spouse 2 has a 40% stake.
Spouse 1 and Spouse 2 would report $60,000 and $40,000 on their Schedule Cs, respectively. The couple then would calculate their individual self-employment taxes on separate Schedule SEs. Finally, the totals from both of the Schedule Cs and Schedule SEs would be reported on the joint return.
The bottom line for QJVs is that the numbers reported are reflective of each spouse's financial interest in the business.
Types of Qualified Joint Ventures
Essentially, only one type of qualified joint venture exists. However, some business owners may have questions regarding if an LLC can elect this tax status, and the answer depends on the state you live in.
If your LLC was not formed in a community property state, filing taxes as a QJV is not an option. However, in these states, community property laws may allow married owners to be taxed as sole proprietors and file a Schedule C and Schedule SE. Of course, all other criteria of QJVs would also need to be met.
- A qualified joint venture is not an incorporated business entity and is treated as a sole proprietorship by the IRS.
- To qualify, owners must be married, file a joint tax return, must both participate materially in the business, and agree to not be treated as a partnership.
- When filing, each spouse fills out a Schedule C and Schedule SE along with their joint tax return.
- This tax election is only available to general partnerships, with the exception being an LLC formed in a community property state.