|
An unincorporated business jointly owned by a
married couple is generally classified as a
partnership for Federal tax purposes. 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 husband and a
wife filing a joint return, can elect not to be
treated as a partnership for Federal tax purposes.
Reasons why a Husband and Wife might want to
make the election not to be treated as a partnership
Because a business jointly owned and operated by
a married couple is generally treated as a
partnership for Federal tax purposes, the spouses
must comply with filing and record keeping
requirements imposed on partnerships and their
partners. Married co-owners failing to file properly
as a partnership may have been reporting on a
Schedule C in the name of one spouse, so that only
one spouse received credit for social security and
Medicare coverage purposes. The election permits
certain married co-owners to avoid filing
partnership returns, if each spouse separately
reports a share of all of the businesses’ items of
income, gain, loss, deduction, and credit. Under the
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 (1) the only
members of the joint venture are a husband and wife
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. A
qualified joint venture, for purposes of this
provision, includes only businesses that are owned
and operated by spouses as co-owners, and not in the
name of a state law entity (including a general or
limited partnership or limited liability company.)
(See below.) The spouses must share the items of
income, gain, loss, deduction, and credit in
accordance with each spouse's interest in the
business. 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.)
How to make the election to be treated as a
qualified joint venture
Spouses make the election on a jointly filed
Form 1040 by dividing all items of income, gain,
loss, deduction, and credit between them in
accordance with each spouse’s respective interest in
the joint venture, and each spouse filing with the
Form 1040 a separate
Schedule C (Form 1040), Profit or Loss From Business
(Sole Proprietorship) or
Schedule F (Form 1040), Profit of Loss From Farming,
and, if otherwise required, a separate
Schedule SE (Form 1040), Self-Employment Tax.
For example, to make the election for 2007, jointly
file your 2007 Form 1040, with the required
schedules (see below.) The partnership
terminates at the end of the taxable year
immediately preceding the year the election takes
effect. For information on how to report the
business for the taxable year before the election is
made, see
Publication 541 on Partnerships and
terminations.
A business owned and operated by the spouses
through a limited liability company does not qualify
for the election
Only businesses that are owned and operated by
spouses as co-owners (and not in the name of a state
law entity) qualify for the 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.
How to report Federal income tax as a qualified
joint venture (including self-employment tax)
Spouses electing qualified joint venture status
are treated as sole proprietors for Federal tax
purposes. The spouses must share the
businesses’ items of income, gain, loss, deduction,
and credit. Therefore, the spouses must take
into account the items in accordance with each
spouse's interest in the business. The same
allocation will apply for calculating
self-employment tax if applicable, and may affect
each spouse’s social security benefits. Each
spouse must file a separate Schedule C (or Schedule
F) to report profits and losses and, if otherwise
required, a separate Schedule SE to report
self-employment tax for each spouse.
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. Using the rules for sole
proprietors, an
EIN is not required for a sole proprietorship
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.
What to do if the spouses already have an EIN
for the partnership
One spouse cannot continue to use that EIN for
the qualified joint venture. The EIN must
remain with the partnership (and be used by the
partnership for any year in which the requirements
of a qualified joint venture are not met.) If
you need EINs for the sole proprietorships, see
above on EINs for sole proprietors.
How to handle requests from the IRS for a
partnership return from the spouses for tax years
for which the election is in effect
Once the election is made, if the spouses receive
a notice from the IRS asking for a
Form 1065 for a year in which the spouses meet
the requirements of a qualified joint venture, the
spouses should contact the toll-free number that is
shown on the notice and advise the telephone
assistor that they reported the income on their
jointly-filed individual income tax return as a
qualified joint venture. Alternatively, the
spouses can write to the address shown on the notice
and provide the same information.
If the spouses elect to be treated as a
qualified joint venture, how do they report and pay
Federal employment taxes?
If the business has employees, either of the sole
proprietor spouses may report and pay the employment
taxes due on wages paid to the employees, using the
EIN of that spouse’s sole proprietorship. If the
business already filed Forms 941 or deposited or
paid taxes for part of the year under the
partnership's EIN, the spouse may be considered the
“successor employer” of the employee for purposes of
determining whether the wages have reached the
social security and Federal unemployment wage base
limits. See
Publication 15 for more information on the
successor employer rules. See above regarding
the allocation of the deductions for income tax
purposes.
Duration that the election remains in effect
Once the election is made, it can only be revoked
with the permission of the IRS. However, the
election technically remains in effect only for as
long as the spouses filing as a qualified joint
venture continue to meet the requirements for filing
the election. If the spouses fail to meet the
qualified joint venture requirements for a year, a
new election will be necessary for any future year
in which the spouses meet the requirements to be
treated as a qualified joint venture.
References/Related Topics
Note: This page contains one
or more references to the Internal Revenue Code
(IRC), Treasury Regulations, court cases, or other
official tax guidance. References to these legal
authorities are included for the convenience of
those who would like to read the technical reference
material. To access the applicable IRC sections,
Treasury Regulations, or other official tax
guidance, visit the
Tax Code, Regulations, and Official Guidance
page. To access any Tax Court case opinions
issued after September 24, 1995, visit the
Opinions Search page of the United
States Tax Court.
Rate the Small Business and Self-Employed Web Site
|
