44 THE QUEENS COURIER • QUEENS BUSINESS • NOVEMBER 8, 2018 FOR BREAKING NEWS VISIT WWW.QNS.COM
TAX TIPS
QUALIFIED JOINT
VENTURES FOR
SPOUSES
BY JOHN SAVIGNANO, CPA
Married couples that jointly own a business often by default choose
to treat the business as a partnership, which requires the business to
file a partnership return. However, in many cases, treating the business
as a partnership and filing partnership returns is optional. A recent
Tax Court case highlights how a married couple’s choice to treat their
co-owned business as a partnership can work to their detriment.
Often, the default choice is to treat the business as a partnership and
prepare a separate return for the business. This can be for a variety of
reasons, including a desire to not report gross income on an individual
return because of the potential increased audit risk, or to provide
liability protection for the owners.
However, there are alternatives. If the business is unincorporated
and both spouses materially participate in its operation, allows the
spouses to make an election to be a qualified joint venture, under
which the business will not be treated as a partnership. Rather, the
spouses are treated as maintaining two sole proprietorships for all
federal tax purposes, including income tax and self-employment tax.
The treatment of the business as a qualified joint venture can have
several beneficial results. The business does not have to file a partnership
income tax return or comply with the record keeping requirements
imposed on partnerships and their partners. As a qualified joint
venture, a business will not be subject to potential penalties for failure
to file partnership tax returns. Additionally, each spouse is credited for
his or her share of the earnings for self-employment tax purposes, and
therefore each is eligible to make a separate qualified retirement plan.
The election to be a qualified joint venture is made by simply preparing
and attaching separate Schedules C, Profit or Loss From Business,
or Schedules F, Profit or Loss From Farming, and Schedules SE, Self-
Employment Tax, for each spouse with a timely filed joint individual
income tax return.
Alternatively, married couples living in community property states
may also treat a co-owned business entity as a disregarded entity for
federal tax purposes. By electing this treatment, the owners are again
relieved of the partnership tax return filing requirements.
The advantage of non-partnership tax treatment was spelled out
recently in Argosy Technologies, LLC. In Argosy Technologies, a
limited liability company was owned 50% each by a husband and wife.
The IRS proposed a levy to collect the owners’ unpaid income tax
liabilities and imposed a penalty for failure to timely file against
Argosy after it filed a U.S. Return of Partnership Income, for 2010 and
2011 after the due dates. The taxpayers petitioned the Tax Court and
argued that they were actually a single-member LLC, not a partnership,
and therefore were not required to have filed a partnership
return.
The Tax Court held that since the LLC had represented itself as a
partnership on its tax returns, it could not argue that it was another
entity and disclaim its validity as a partnership. Had the partnership
returns not been prepared and a qualified joint venture or
disregarded-entity election been properly made, the partnership
penalties would have been avoided.
John Savignano is a partner with Savignano Accountants & Advisors
located at 47-46 Vernon Blvd., Second Floor, in Long Island City. If you
have any questions or require additional information, please call John at
718-707-0955.
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