What is a Qualified Joint Venture and Why Create One?
A qualified joint venture is a special tax election made by a married couple who is jointly running a business.
With that short and sweet definition out of the way, there is a lot of information about why it was created by the IRS and the benefits to the couple in the way of taxation. Before its inception, many married couples operating a business with both involved would find themselves not sure how to file. Or, in many more cases, the couple was forced to set up the business as a Limited Liability Company (LLC) or a partnership. Both involved additional paperwork, filings, time, and money.
There were also a great many married couples who elected to avoid the additional paperwork and file as sole proprietors, only one spouse was allowed to be classed as self-employed. This meant only that spouse could take advantage of Social Security and Medicare coverage and the business deductions for it.
IRS Creation of the Qualified Joint Venture
The IRS created the Qualified Joint Venturei specifically to handle this issue. The couple are equally involved in the operation, risks, and profits of the business. The qualified joint venture status allowed both spouses to take advantage of business contributions on their behalf to Medicare and Social Security.
The IRS created the QJV as a “common sense” change to the tax code to allow married couples to file a tax return that accurately represented the joint ownership and sharing of risks and rewards. Using the QJV, both spouses can take advantage of the self-employed status to contribute to Social Security and Medicare individually. The IRS lays out a list of simplified criteria to qualify for QJV status:
- The only owners of the business are a married couple who file a joint tax return.
- Both spouses materially participate in the operations of the business.
- Both spouses also agree to be treated as a joint venture rather than a partnership.
Meeting those criteria opened a simpler and less expensive business entity with tax advantages for the “mom and pop” enterprise.
How a Qualified Joint Venture Files Taxes
One of the best benefits of the QJV setup is the ease of filing taxes as they are filed on the joint return 1040. With the IRS treating the business as a melding of two sole proprietorships, the spouses each file their separate Schedule C, Profit and Loss from a Business as well as two separate Schedule SE forms to report Self Employment Tax.
The entries on their individual Schedule C forms are based on each spouse’s interest in the business. If they each have a 50% interest in the business and the profits are $60,000, then each would report $30,000. Deductions are split in the same way through percentage of interest.
Are there Negatives for the Qualified Joint Venture Designation?
For most married couples the election for QJV is a positive decision. This is if one of them would have chosen the sole proprietorship as the tax entity anyway. This is because the sole proprietorship has no liability protection for the owners. Any legal actions against the business will have access to the assets of the owners.
One other drawback would be how much money the business makes in profits. If it gets to a certain point, the owners could end up paying more in taxes than they would if they had chosen another structure, such as a corporation. This is a discussion to have with a CPA or other tax professional.
As with any decision related to the business tax entity, it is critical to discuss it with a CPA or tax professional. Going over expectations for the growth of the business, liability, and other issues will help in making the right decision.