When a husband and wife work together, there are potential tax savings they can share. Special IRS rules apply to spouses who own a business together.
These rules allow them to report business income as a sole proprietorship, even if there are two owners.
By default, a business owned by two spouses will be treated as a partnership for tax purposes. This means that the business will need to file a partnership tax return and then provide individual schedules, showing the share of income attributable to each of the spouses.
Each spouse will then be required to report the income from the partnership schedules on their personal tax returns, and they will be required to pay taxes based on the two separate incomes.
Become a Qualified Joint Venture
IRS rules usually have specific terms associated with them. In this case, a husband-wife proprietorship is called a “qualified joint venture,” if it meets certain conditions. This business structure is allowed under the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28).
A qualified joint venture is one whose only members are a husband and wife filing a joint return. In addition, both spouses must materially participate in the business, and both spouses must choose not to be treated as a partnership for tax purposes.
To qualify for this type of tax treatment, the business cannot be set up as a legal partnership, or register as a corporation, in any state. That will limit the ability of the company to attract outside investors, but this choice can have significant tax benefits.
Filing income taxes under the qualified joint venture rule is simpler than the partnership requirements. The business itself will not have to make a separate filing, as a partnership is required to do. Each spouse reports their share of the income on their personal, joint tax filing.
Simplicity is a benefit in itself when filing taxes. Each additional form can create additional costs when using a tax professional, and each form carries its own risk of introducing innocent errors. The decreased reporting requirements of the qualified joint venture may be reason enough to make the decision to file under this rule.
There is also the possibility that the total tax bill could be less by using this rule. There are some separate rules covering the self employment tax that could help lower the amount a husband and wife owe in taxes as a qualified joint venture.