It has been said that marriage is a partnership. Sometimes, however, marriage can be a sole proprietorship, or a joint venture, or an LLC. Many married couples decide to go beyond the metaphorical business of marriage and go into actual business together.
As with any other company, those established and managed by spouses can take many different forms, each of which comes with its own legal requirements and tax obligations. But the unique nature of the relationship also gives spouses/co-owners/partners equally unique options in terms of how they treat their business and income for tax purposes.
Choosing a business entity structure for your joint venture with your spouse
If you and your spouse jointly own a business, you need to understand these options as you prepare your returns to ensure that you are maximizing the tax benefits and minimizing filing burdens and complications. How you do so will depend primarily on the kind of entity you own.
Unincorporated Businesses
Married couples who have not formed a limited liability company or other state-sanctioned business entity may be able to choose how the IRS taxes their business.
Typically, an unincorporated business jointly owned and operated by spouses is treated as a partnership for tax purposes. It is important to note that if the business relationship between the spouses is more akin to employer-employee (i.e., one spouse substantially controls management decisions and the other spouse directs and controls the first spouse), this may not be the case.
If, however, both spouses have an equal say in the business, provide substantially equivalent services, and contribute capital to the business, and they want to treat their business as a partnership for tax purposes, they will need to file Form 1065, U.S. Return of Partnership Income. The partnership itself doesn’t pay taxes on its income but “passes through” any profits or losses to the spouses.
Electing NOT to be treated as a Partnership
Some co-owning and operating spouses who file their taxes on a joint return may choose a different path and elect not to have their business treated as a partnership. Jointly filing spouses/co-owners can instead choose to treat their business as a “qualified joint venture” if all of the following apply:
- the only members of the joint venture are a married couple who file a joint tax return
- both spouses materially participate in the trade or business
- both spouses elect to have the provision apply, and the business is co-owned by both spouses and
- the business isn’t held in the name of a state law entity such as a partnership or limited liability company (LLC).
Couples electing treatment as a qualified joint venture will not need to file a Form 1065 for any year the election is in effect. Instead, they are treated as sole proprietors. They make this election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each of their respective interests in the joint venture. Each spouse will attach their own separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) to their jointly filed 1040.
Why you might elect to be a Qualified Joint Venture instead of a Partnership
There are some practical advantages to choosing the joint venture route over the partnership route. These include:
- not having to file a partnership income tax return
- not having to comply with the recordkeeping requirements imposed on partnerships and their partners
- not being subject to potential penalties for failure to file partnership tax returns
- not needing an Employer Identification Number (EIN) for the business
- credit to each spouse for his or her share of the earnings for self-employment tax, social security, and Medicare coverage purposes
Limited Liability Companies
In non-community property states like Illinois, limited liability companies in which the husband and wife are the sole members can choose to file either as a partnership or a corporation (either C or S), but cannot elect to be a “qualified joint venture.”
Of course, how a couple chooses to form, operate, and treat their business for tax purposes has other implications as well, both in terms of their personal relationships today or lack thereof in the future. If you and your spouse are in business together or are thinking of doing so in the future, please contact us to discuss your options and learn which path is best for you.