Client Update: Qualified Joint Venture Election for Married Business Owners

This Client Update discusses the qualified joint venture election for married couples who jointly own an unincorporated business.

Generally, an unincorporated business jointly owned by a married couple is a partnership for federal tax purposes. However, a married couple that owns a “qualified joint venture” and files a joint return can choose not to be a partnership by making a qualified joint venture election.

Qualified joint venture election.

A “qualified joint venture” is a trade or business jointly owned by a married couple who both materially participate in the business. To make a qualified joint venture election, the couple must file a joint return and both spouses must elect to be a qualified joint venture.

Taxpayers who make the qualified joint venture election don’t have to file a Form 1065, US Return of Partnership Income. Instead, all items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Then each spouse accounts for their share of these items as a sole proprietor on the form appropriate for the business, such as Schedule C (Form 1040), Profit or Loss From Business.

Note. The business must be co-owned only by the married couple (no other owners allowed) and can’t be held in the name of a state law entity such as a partnership or an LLC.

Self-employment taxes.

For a married couple who makes the qualified joint venture election, net earnings from self-employment are accounted for by each spouse separately, based on their respective interest in the venture, on Schedule SE (Form 1040), Self-Employment Tax.

Making the qualified joint venture election.

A married couple makes a qualified joint venture election on a jointly filed Form 1040 or 1040-SR 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.

With their jointly filed Form 1040 or 1040-SR, each spouse then includes a separate Schedule C or Schedule F, Profit of Loss From Farming to report their share of the business’s items and, if otherwise required, a separate Schedule SE.

Since the qualified joint venture election treats the spouses as two sole proprietors, the couple generally won’t need an employer identification number (EIN) for their business. However, if the business is required to file excise, employment, alcohol, tobacco, or firearms returns it will need its own EIN.

If an EIN is required, one spouse should complete a Form SS-4 and request an EIN as a sole proprietor. Then, that spouse should report and pay the employment tax due on wages paid to the employees using the business’ EIN.

Duration of election.

Technically, once the couple makes the qualified joint venture election, it can be revoked only with the IRS’s permission. However, the election only remains in effect for as long as the spouses continue to meet the requirements for filing the election. For example, the election would no longer be valid if one of the spouses sold their share of the business, the couple failed to file a joint return, or one spouse refused to make the QJV 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.

For more information about the spousal joint venture election out of partnership treatment, see Checkpoint’s Federal Tax Coordinator ¶ B-1215.