Tax treatment for married-couple owned businesses

Couple looking over business expenses and paperwork

Are you and your spouse considering starting a business together here in Missouri? If so, you have numerous issues to consider, and one of them is more than likely taxes. The information below focuses only on taxation, which is just one factor that goes into making decisions regarding your new business, but the more information you have, the more informed decisions you make.

You may want to explore tax treatment options for your business before deciding on an entity structure since the type of entity you choose often decides how you and your business will pay taxes. If you intend to run the business together as equal partners, then you may want to consider a special tax structure for joint ventures owned solely by married couples.

Doesn’t the IRS tax joint ventures as partnerships?

Ordinarily, the IRS does tax joint ventures as partnerships. However, Congress passed the Small Business and Work Opportunity Tax Act of 2007 in May of that year. As part of the Act, a qualifying joint venture owned and run by a married couple is to receive sole proprietor tax treatment instead. In order to qualify, your business must meet the following criteria:

  • You cannot choose to form an entity such as a limited liability company or partnership.
  • You and your spouse must equally own the business.
  • You and your spouse must be the only members of the joint venture.
  • You and your spouse must file your personal income taxes as married joint.
  • You must both agree to apply this provision to your business.

This means that you and your spouse divide all gains, losses, income, credits and deductions in accordance with your individual interests in the business. You will take income and losses into account when determining your net earnings as a self-employed taxpayer. Taking advantage of this tax treatment allows each of you to earn credit for Social Security earnings. More often than not, it does not increase your tax obligations to use this option.

This may seem like a good idea, but other considerations could make it less of a benefit to your situation. As is the case with nearly every tax rule, exceptions exist. If you fail to gain an understanding of both the pros and cons before making a decision, it could end up adversely affecting you and your business. For this reason, it may serve your best interests to schedule a consultation with a tax attorney who can answer your questions and provide advice regarding your next steps.

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