The Tax Implications of a Joint Venture
Fortunately, the federal government does not recognize a joint venture as a business structure; thus, the joint venture itself does not have to file a tax return. However, as a member of a joint venture, there are taxation steps you must take to ensure you are covered legally.
When you enter into a joint venture with another person, you are signing a contractual agreement that links your businesses for a certain length of time for a certain purpose. As a result, a separate company is not created, and therefore, when you conduct business as part of the joint venture, you will still be conducting business on your own behalf.
Contracts or vendor agreements you sign will carry your name. Your partner in the joint venture will only be obligated to cover these contracts to the extent that is outlined in your joint venture agreement. For this reason, the federal government does not view your joint venture as its own business entity, making it unnecessary to file a tax return for the venture.
However, since the costs and revenue of the joint venture pass through to the individuals that signed the deal, you must report any and all earnings on your own tax return.
How to Report Your Joint Venture on Your Tax Return
Although the venture itself does not have to file a tax return, as one of the co-venturers, you will need to submit a Form 1065 to the IRS. Both partners will file this form, which allows the IRS to determine if income from the venture is being accurately reported.
You must also submit a Schedule K-1, which outlines how the profits and losses are distributed between the partners in the venture. Remember, this information should have been clearly explained in your joint venture agreement. It is important to note that if you don’t outline how you and your partner will share profits, state law may dictate a split for you.
Drawbacks to Joint Venture Taxes
In the end, joint venture taxation law may cost you more money, but no more than any other partnership type. The IRS expects partners to pay taxes on their distributive share of the profits (i.e. the profits you are entitled to, according to the joint venture agreement) even if you don’t receive them.
For example, at the time of your tax return filing, your joint venture may be ongoing. As a result, you may want to keep your earnings in the venture to pay for future expenses. Even though these earnings are not “in your pocket,” you are still expected to pay full taxes on them.
Additionally, you will be required to pay self-employment tax. This tax is reported on Schedule ES and is filed with your tax return.
The good news is that you can also report business expenses on your own tax return to mitigate the amount of tax you’ll have to pay. It’s a good idea to have your taxes reviewed by a professional accountant to ensure that you are deducting only “ordinary and necessary” expenses so as to avoid an IRS audit.
Joint venture tax implications are on-par with the tax implications of other types of partnerships. Only corporations, which file tax returns separately, do not have to worry about personally reporting earnings. In the end, the benefits of the joint venture and working with a partner may outweigh any of the tax ramifications.