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Equine Accounting: Qualified Joint Venture for Husband and Wife Operations

At many horse farms, the revenue from the farm represents the primary source of income for both the husband and the wife. In order to receive credit for their income for purposes of calculating future Social Security benefits, many couples have resorted to changing their form of taxable entity from sole proprietorship to a partnership or S corporation. This results in an initial expense for legal costs as well as additional fees for preparation of more complication partnership or S corporation returns each year. However, there is another less expensive and less complicated option: the qualified joint venture.

Beginning in 2007, an unincorporated business that is jointly owned by a married couple may elect to be treated as a qualified joint venture. The couple must file a joint tax return. Each spouse must "materially" participate in the business and the business may not be owned in the name of a "state law entity" - an LLC or LLP.

Each spouse must report their share of the all of the business income and deductions and each will receive credit for purposes of Social Security benefits calculation. The division of income and deductions between the couple should be based on each spouse's interest in the business. Generally, this can be calculated based on time and/or funds invested in the business. So each spouse would include in their jointly filed Form 1040 a separate Schedule C or Schedule F, with their share of income and expense as well as a separate Schedule SE to report self-employment tax. In most cases, this division of income does not increase the amount of tax due.

If, however; Spouse 1 substantially controls the management of the business and Spouse 2 is under the "direction and control" of Spouse 1, an employment type of relationship exists and would not meet the criteria of a qualified joint venture. Spouse 2 should be considered an employee and is subject to income tax and FICA (Social Security and Medicare) withholding. As the employer, Spouse 1 is responsible for FICA taxes but not Federal Unemployment Tax.

Why is this important to know? If you and your spouse are planning to spend a considerable percentage of your working life on the farm, you need to be sure that each spouse is accumulating wages that are included in calculating future Social Security benefits. We don't like to think about the possibility of losing our spouse but especially in the case of a family with children, it's important to plan in advance to minimize the economic impact of the death of a spouse.