Remember three years ago when you depended on Zoom for work meetings and virtual schooling for your kids? While you’re probably really grateful the second one isn’t a reality anymore, the first one still had its appeal (unless something like this happened).
Working from home had its perks.
In a stroke of irony, the company that enabled us all to work from home during the era of social distancing recently started requiring their employees to spend some time in the office. Time to swap sweats for slacks.
Unless you and your spouse run your business together. In that case, your WFH options might be more flexible. But there are other considerations for married joint ventures beyond working location that I want to bring up today.
As far as business ownership and marriage go, you can obviously have one without the other, but when you and your spouse team up to build a business together as co-owners, it’s a good idea to look at the implications of that — both in a relational sense and but also (for today’s purposes) in an entity structure sense as well.
See what I mean below…
Why Married Owners Might Choose the QJV Route
“To get the full value of a joy you must have someone to divide it with.” – Mark Twain
More than one married couple has taken their domestic success professional, working together to build a company. It’s an old story, and it can be a happy one – but it can also run afoul of tax law without proper planning.
The IRS maintains that business partners should be filing a partnership tax return, period, the IRS Form 1065. A partnership that fails to file a 1065 (and a lot of married “co-workers” neglect to) risks penalties.
Let’s look at those hefty fines – and a smart way for married owners to avoid them.
IRS Form 1065 is an annual tax return used to report the income, gains, losses, deductions, credits, and other information from a partnership. A partnership doesn’t pay tax on its income but passes through profits or losses to its partners, who include partnership items on their own tax returns. You file a 1065 on the 15th of every March, unless a holiday or weekend changes that deadline.
Uncle Sam takes this form seriously: The penalty for failing to file a 1065 by the due date (barring “reasonable cause,” which is up to the IRS), is 220 bucks for each month up to 12 months multiplied by how many people were partners in the partnership during any part of the tax year for which the return is due. Plus, up to a quarter of any taxes you failed to pay.
That’s potentially pushing five figures that a partnership could owe simply because married owners thought “for richer or poorer” meant when they were in business, too.
And a 1065 is only part of the onerous tax paperwork a partnership has to file annually. Is there no way around this?
Three little letters
The IRS generally considers a business jointly owned and operated by married owners as a partnership for tax purposes, meaning the couple must meet the filing and record-keeping requirements we just mentioned. Plus, married co-owners failing to file properly as a partnership might have been filing a Schedule C, “Profit or Loss From Business,” in just one of their names – meaning only one spouse gets credit for Social Security and Medicare coverage.
Unless … they elect to have the business treated as a qualified joint venture.
In the eyes of the IRS, a QJV is a joint venture that conducts a trade or business where the only members of the venture are a married couple who file a joint return, who both elect not to be treated as a partnership, and who both spouses materially participate in the trade or business or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm.
A QJV includes only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or limited liability company. (LLCs can be qualified joint ventures only in community property states; extra tax forms may be involved in these cases, so check with us.)
Spouses make the election on a jointly filed tax return, the IRS 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 venture.
Each spouse also files their own Schedule C or Schedule F (for farming).
Pros and cons for married owners
Pros: Easy tax filing is the obvious first one. Partnerships come with a lot of paperwork, such as the 1065 and a Schedule K-1 for each partner and their income, deductions, and so on. QJVs come with no additional forms. Spouses in a qualified joint venture also don’t generally need an Employer Identification Number (EIN). (Check with us if you had EINs already for a partnership.)
In fact, the IRS started QJVs more than 15 years ago as a sensible answer to the tax agency’s suspicions that more married business co-owners were letting just one spouse take all the business income and file the Schedule C and Schedule SE (for taxes on self-employed income) just to make paperwork easier.
The second major plus: the recognition of self-employment taxes paid. Pre-QJV, only that spouse who reported self-employment income (again, to save on paperwork) got credit for taxes paid and built their Social Security benefits for retirement.
Cons: We mentioned that LLCs can’t be QJVs; in the latter, both spouses are sole proprietors in a jointly owned business. That means no shielding business entity between the owners and personal liability for the business. Co-owners in a QJV might also pay more in taxes because they don’t have a corporation’s tax-advantaged structure.
For some (though certainly not all) spouses in business partnerships, the QJV can really be a lifesaver.
Now, while I’ve laid things out here, there’s certainly more to discuss for married owners. If you own a business with your spouse and want to discuss this more in-depth, you know where to find me:
I’m always here to help you make the right decisions for your business. Reach out any time.
In your corner,
Emelia Mensa, CPA