In commercial real estate business ventures, a married couple will sometimes co-own property or run a business together. When this situation occurs, there are a special set of tax circumstances a couple may qualify for. This status is known as a qualified joint venture, for federal tax purposes.
What Is a Qualified Joint Venture?
As opposed to more general types of joint ventures, a qualified joint venture, or a QJV, is a specific tax situation in which a married couple jointly running a non-corporation business files taxes as a sole proprietorship instead of a partnership. A sole proprietorship is typically a business owned by one person, but for tax purposes in the case of a QJV, the sole proprietorship is a married couple. In this scenario, both individuals must materially participate in the business.
Example of a Qualified Joint Venture
One example of a QJV is if a married couple owns a store together. Each of them owns 50% of that business, also referred to as joint venture equity. If their total profit for the year is $100,000, then they split that $100K equally. On their tax forms, they each file a Schedule C in which they divide the total income in half, make their deductions, etc., as one would on any tax form as a sole proprietor
Can I Form a Qualified Joint Venture from Jointly Owned LLCs?
LLCs, or limited liability companies, do not qualify for QJVs — for federal tax purposes — according to the IRS. However, there are exceptions. Ann Martin, Director of Operations at Credit Donkey Credit Card Processing told Leverage.com, “If your state is a community property state, then you can form a QJV from a jointly owned LLC.”
In a community property state, versus a common law state, each spouse is considered to own an equal interest in all marital property, effectively forcing them into a joint venture. The two spouses become one economic unit. Currently, the community property states are Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico and Wisconsin. In those states only, married couples can form a QJV from a jointly owned LLC.
How Choosing a Qualified Joint Venture Affects Your Tax Return
When filing taxes for a QJV, there’s significantly less paperwork and effort involved than there would be for a formal partnership.
Pros and Cons of Qualified Joint Ventures
There are, however, a number of ups and downs when it comes to qualified joint ventures.
1. No Need to Prepare a Traditional Partnership Tax Return
The main pro of filing a QJV is not having to prepare a traditional partnership tax return. Joshua M. Hanover, CPA, EA at Marks Paneth Accountants & Advisors told Leverage.com that with a partnership, “there’s a separate income tax return that has to get filed, with a slew of different questions. And if any one of them is answered in a certain way, you could open up the door to multiple other tax filings that are required.”
2. You Only Need to File an Individual Tax Return
With a QJV, you only need to file an individual tax return, rather than an individual plus a partnership tax return. This benefit, Hanover said, “cuts your risk of audit in half.” With two separate filings, there’s more of a chance that the IRS will choose one at random, leading them to also look at your other return.
3. Saving Money on Accounting Fees
Filing a QJV versus a partnership tax return also saves money. With a partnership, individuals have two returns to file, and that’s more money to an accountant, Hanover pointed out. It’s also more record-keeping to ensure you have all of the information a partnership return requires.
4. Better Social Security and Health Benefits
In some other instances, married couples who elect not to file as neither a partnership nor a QJV often file their taxes under the name of only one spouse. However, this method means only one spouse can receive credit for social security and Medicare coverage, according to the IRS. Filing as a QJV ensures both individuals receive social security credit and Medicare.
1. Divorces Become Worse
On the other hand, a QJV can get tricky in the case of divorce, especially if there’s no post-nuptial agreement.
“A divorce can kill your business,” Hanover said.
2. The Mixing of Personal and Business Finances Can Cause Finance Problems
Because a QJV is more informal than a partnership, personal and business finances get mixed together. For instance, a couple may have only one joint bank account, rather than a personal account and a business account. This consolidation actually complicates business matters when the couple is splitting their assets.
The mixing of business and personal can also affect couples if they try to sell their business at any point in the future.
Hanover warned, “You don’t have a separate snapshot in time as to how the company’s doing on an annual basis. It’s all kind of lumped in with your individual stuff.”
Because there’s less paperwork with a QJV election than there is with a formal partnership or joint venture, there’s likely no formal financial statements either. This lack of underwriting material makes the business harder to sell down the road.
3. Business Lawsuits Can Affect Personal Finances and Vice Versa
Liability can also become an issue when business and personal are combined. If there’s no formal distinction between personal and business assets, a lawsuit stemming from a personal matter can put your business finances at risk, and a lawsuit stemming from a business matter can put your personal finances at risk.
Hanover again warned, “They can come after you and your personal assets when they should theoretically be limited to whatever is business.”
How to File Your Taxes as a Qualified Joint Venture
As stated above, when filing taxes as a QJV instead of a typical partnership, the process is simpler than that of a formal partnership.
1. Complete a Personal Schedule C Tax Form
Each spouse needs to complete their own Schedule C or C-EZ, as if they were sole proprietors, to show their individual income and expenses. These figures are calculated by splitting the business income and expenses in half so each spouse is entitled to their half.
2. Complete a Schedule SE Tax Form
A schedule SE form is a self-employment tax form. Each spouse must pay self-employment taxes, which cover social security and Medicare.
3. Complete a Schedule E For Rental Properties
If a couple profits from renting out real estate, they can file a QJV and report rental income on a Schedule E instead of a Schedule C.
A Qualified Joint Venture Makes Taxes Easier for Couples Owning a Business
If you’re a married couple who owns a business or rental property, filing taxes as a QJV rather than a partnership can end up saving a great deal of time, effort and money. However, it’s always important to keep detailed documentation of business finances and to have a contingency plan or post-nuptial agreement so a separation doesn’t negatively affect the business.