What is a Qualified Joint Venture for Spouses in Business?
What is a Qualified Joint Venture?
A “qualified” joint venture is a joint venture that conducts a trade or business:
- Is where the members of the joint venture are a married couple who file a joint tax return.
- Where both spouses materially participate in the business or trade.
- When both spouses elect not to be treated as a partnership.
According to the IRS, a qualified joint venture for spouses includes only businesses that are owned and operated by spouses as co-owners. The business cannot be operated in the name of an entity defined in state law as a partnership or LLC. Both spouses must “materially participate” in the business. To qualify as materially participating, the person must pass at least one of seven tests, as described here in IRS Publication 925:
- You participated in the activity for more than 500 hours.
- Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
- You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
- The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test.
- You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
- The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
- Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
There are benefits of the joint venture over a partnership for a married couple.
Why Elect a Joint Venture vs. a Partnership for Spouses in Business?
The partnership business entity isn’t known for its simplicity in reporting and tax compliance.
- The partners must comply with filing and record-keeping requirements that the IRS imposes upon the partnership business entity.
- If in avoiding the partnership structure, both spouses were reporting under one spouse on the Schedule C, only that named spouse gets credit for Social Security and Medicare coverage.
Under the qualified joint venture structure, each spouse gets credit for Social Security and Medicare if they separately report their share of:
- Income items
The benefit of both getting credit for Social Security and Medicare can be considerable in later years.
How to Make the Election to be Treated as a Qualified Joint Venture
Both spouses make the election to be treated as a qualified joint venture on the joint form 1040 or 1040-SR. They do so by dividing the items listed above according to each spouse’s share of ownership/interest in the joint venture.