Starting a business with your spouse may lead to interesting tax consequences when you file your annual income taxes. Sole proprietorships report their business income and expenses on Schedule C of the 1040 personal income tax form. When a husband and wife are partners in the business, use two Schedule Cs to report the business income and expense. This is necessary because both the husband and wife need to have their work history accurately reported to the Social Security Administration. Otherwise, one of the spouses will not receive the proper amount of Social Security Retirement income.
IRS Definition of a Qualified Joint Venture
According to the Internal Revenue Service, “A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.”
Start the Division of a Qualified Joint Venture
One of the best place to begin to figuring out the two separate Schedule C’s is to fill out a Schedule C for the business itself. You will not file this Schedule C, but it will help when you are ready to divide it between the partners.
Set the Percentages of a Qualified Joint Venture
To begin, decide what percentage of the business belongs to each spouse. This can be be 50/50, 60/40 or whatever you have agreed to. This amount should remain the same for as long as you own the business. You can change the percentages, but that might raise a red flag with the audit department of the Internal Revenue Service.
Fill out the Two Official Schedule Cs for the Qualified Joint Venture
Once you have settled on your percentages, turn to your business’s Schedule C. Use the percentage and multiply each category of the Schedule C by that percentage. Have two blank Schedule Cs available so that you can fill out each person’s percentage as you go.
Transfer the Figures for the Qualified Joint Venture to your 1040
When you have figured out all of the entries, including any supporting documents such as the depreciation Schedule, combine the two numbers and enter it in the appropriate line of the 1040.
Any time you have two identical forms, though the amounts may be different, just add/subtract them to combine them and carry the combined amount to the proper form.
Check out What an Schedule SE actually is
One area that will not have combined numbers is the Schedule SE form. The Self-Employment form is where your business profit will be credited to your Social Security account for your retirement. Each of you should have a separate Schedule SE.
Double Check All of Your Figures for Accuracy
One thing to be careful of is if you have a negative amount in some area and a positive amount in another, do not accidentally add them together. You may pay more taxes than you actually owe.
References you may want to check out:
Internal Revenue Service: Husband and Wife Business
Internal Revenue Service: 2009 Instructions for Schedule C (2009)