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Sunday, June 25, 2023

What about Expanding the Qualified Joint Venture Election?

2 stick figures looking at a paper

I think to generate simplification ideas, we need to look at every tax rule or calculation and ask at least two questions. First, should this rule even be part of this type of tax? After all, the federal income tax has over 160 "tax expenditures" which are special rules that are not part of the basic income tax structure (see OMB FY2024 report). Next, is there a different way to draft the rule or handle the computation?  We get so used to certain rules, forms, and practices that we often act as if that is the only way something can be done.

I want to offer an example of an out of the box idea that does have some basis in an existing tax rule. I recently suggested this in comments I submitted for the written record of a June 7 joint hearing of the Senate Finance Committee and Small Business and Entrepreneurship Committee, on tackling tax complexity for small businesses.  Among my suggestions, I offered this:

Allow co-owners of a start-up business to elect qualified joint venture status for the first few years.

IRC Section 761(f) allows a married couple to elect to treat a business they jointly own and operate as a “qualified joint venture” rather than as a partnership. The couple files two matching Schedules C rather than a Form 1065 partnership return. This is simpler for the couple and enables both spouses to pay into the Social Security system. [see IRS information]

Filing two Schedules C is much easier than filing a partnership return including a Schedule K-1 (as well as Schedule K-3) for each partner.

The qualified joint venture option should be expanded to make it available to equal owners of any business (perhaps limited to two to four equal owners). Schedule C could include a box for making the election. To avoid any concern about disclosure of each owner’s SSN to the other owner(s), each owner could be required to obtain an EIN to enable the IRS to confirm that each owner filed an identical Schedule C. Any concern about the need to file as a partnership can be addressed by only allowing qualified joint venture status for the first three years or until gross receipts exceed a certain threshold.

Qualified joint venture status should also be allowed even if the business is formed as an LLC. States should be highly encouraged to conform to this broadened qualified joint venture option to truly provide simplification to small business owners. Also, the ease of this filing compared to filing a partnership return should also improve compliance.

What do you think?

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