Husband and Wife Business Issues
Question: Can a husband and wife operate a business as a sole proprietorship?
Answer: Generally, any business with more than one owner, including a business owned jointly by a husband and wife, is taxed as a partnership or a corporation. To be treated as a sole proprietorship, the business must be solely owned by one spouse, although the other spouse can work in the business as an employee.
There are two exceptions to the general rule:
- A business jointly owned and operated by a husband and wife where the spouses elect to be treated as a "qualified joint venture."
- A business jointly owned and operated by a husband and wife in a community property state.
Question: When can a husband and wife operate a business as a qualified joint venture?
Answer: A married couple who jointly own and operate a trade or business may treat each spouse as a sole proprietor by electing to file their tax returns as a "qualified joint venture."
To elect to be a qualified joint venture, the business must meet the following requirements:
- The only members in the joint venture can be a husband and wife.
- The husband and wife must file a joint tax return.
- The trade or business must be owned and operated by the spouses as co-owners and not in the name of a state law entity such as an LLC or LLP.
- The husband and wife must each materially participate in the trade or business.
- Both spouses must elect qualified joint venture status on Form 1040 by dividing the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in the venture. Each spouse must file with the Form 1040 his and her separate Schedule C, C-EZ, or Form 4835 accordingly, and, if required, a separate Schedule SE to pay self-employment tax.
Question: Can a husband and wife operate a business entity as a sole proprietorship if they live in a community property state?
Answer: A married couple who own a business entity and live in a community property state may qualify to have the entity treated similarly to a sole proprietorship. These special rules for spouses in community property states are contained in IRS Revenue Procedure 2002-69.
If the business is a "qualified entity" (as defined in section 3.02 of Rev. Proc. 2002-69), and the husband and wife, as community property owners, treat the entity as a disregarded entity for federal tax purposes, the IRS will accept the position that the entity is a disregarded entity for federal tax purposes.
Section 3.02 of the revenue procedure states that a business entity is a qualified entity if:
- The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
- No person other than one or both spouses would be considered an owner for federal tax purposes; and
- The business entity is not treated as a corporation.
If the husband and wife treat the qualified entity as a partnership for federal tax purposes and file the appropriate partnership returns, the IRS will accept the position that the entity is a partnership for federal tax purposes.
If the husband and wife change the reporting position from a disregarded entity (sole proprietorship) to a partnership, or vice versa, the change will be treated for federal tax purposes as a conversion of the entity.
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