Unincorporated business election for married couples
An unincorporated business jointly owned by a married couple is typically treated as a partnership for Federal tax purposes. However, under the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28), starting from tax years after December 31, 2006, a “qualified joint venture” consisting solely of a married couple filing a joint return can elect not to be treated as a partnership for Federal tax purposes.
When a business is jointly owned and operated by a married couple and is treated as a partnership, both spouses must adhere to partnership filing and record-keeping requirements. Previously, some married co-owners incorrectly reported their business income on a single Schedule C under one spouse’s name, which meant only that spouse received credit for social security and Medicare purposes. The election allows eligible married co-owners to forgo partnership tax returns. Instead, each spouse reports their respective share of the business’s income, losses, deductions, and credits separately. This election ensures both spouses receive credit for social security and Medicare purposes.
Definition of a Qualified Joint Venture
A qualified joint venture is formed when a married couple, filing a joint return, jointly operates a trade or business. To qualify, both spouses must materially participate in the business and elect not to be treated as a partnership for tax purposes. This provision applies specifically to businesses owned and operated directly by the spouses, not by a separate legal entity like a limited partnership or LLC. Joint ownership of non-business property does not meet the criteria for this election.
Under this arrangement, each spouse shares the business’s income, losses, deductions, and credits according to their respective ownership interests. “Material participation” follows the same definition as outlined in the passive activity loss rules under section 469(h) and related regulations (refer to Publication 925, Passive Activity and At-Risk Rules). It’s important to note that rental real estate income or loss generally remains passive under section 469, despite meeting material participation requirements, and electing as a qualified joint venture does not change the passive income or loss classification unless specific conditions under section 469(c)(7) are met.
How to Make the Election to be treated as a Qualified Joint Venture
Spouses can make the election by jointly filing Form 1040 and dividing all items of income, gain, loss, deduction, and credit according to their respective interests in the joint venture. Each spouse must then file a separate Schedule C (Form 1040) or Schedule F (Form 1040), depending on the nature of the business, along with a separate Schedule SE (Form 1040) if required. For instance, to elect for the year 2014, both spouses should jointly file their 2014 Form 1040 along with the necessary schedules (refer below). The partnership ends at the conclusion of the taxable year immediately preceding the year in which the election becomes effective. For guidance on reporting the business income for the taxable year preceding the election, consult Publication 541 on Partnerships and terminations.
For more information, visit IRS.gov or contact a ShindelRock tax professional.