Can I amend my sole proprietorship schedule C returns to qualified joint venture and for how many years?

[FrankinFlorida]

My wife and I started our business 10 years ago and we've been 50/50 since the beginning.  We had an accountant who had us do a schedule C return with me as the sole proprietor and her listed as a homemaker.  I never understood the returns, nor did I pay much attention to it until I started learning more about taxes as a hobby.  Then, I learned that my wife basically has no social security earnings and when she retires she'll have no SS.  How do I fix this?

[Anonymous_]

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@FrankinFlorida wrote:

....I learned that my wife basically has no social security earnings and when she retires she'll have no SS.  How do I fix this?

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If your wife did not materially participate in the business, you can't "fix it".

See https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorpo...

A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership.

[TomD8]

With a qualified joint venture, each spouse must divide all the income & expenses in accordance with their interest in the business, and each must file a separate Schedule C (and, if otherwise required, a separate Schedule SE) with their jointly filed tax return.

You have three years from the due date of the original return to file an amended return.

[Opus 17]

I have to suggest you see a professional.

At this point, you can amend your 2019-2022 returns.  You must generally file an amended return within 3 years of the filing deadline, but since the deadline for 2019 returns was extended to July 15, 2020 due to the pandemic, you still have about a month to amend your 2019 return.  You have a year or more to amend your 2020, 2021 and 2022 returns. 

However, this rule usually applies to amending for a refund.  If you need to amend to pay more tax, the IRS will happily accept it any time.  It may be possible for you to file amended returns going back 10 years to change your sole prop to a QJV, because it will not result in a refund, it will only change to whom the taxes were assigned.  This is why I want you to consult with an enrolled agent -- this is an accountant specially admitted to practice before the IRS.  

There are 5 ways you can handle a spouse who participates in your business. 

1. File as a qualified joint venture.  Each spouse files a schedule C to report their share of business activity, income and deductions.

2. File as a sole prop and hire your spouse as a W-2 employee.  You deduct the wages and employment taxes as a business expense and they report the income.

3. File as a sole prop and employer your spouse as a subcontractor.  You deduct the subcontractor payments and the spouse files a schedule C as an independent contractor.

4. File a 1120-S form 1065 partnership return (not recommended if you are eligible to file as a QJV).

5. File as a subchapter-S corporation (not recommended without professional advice).

You can only pay your spouse wages, or hire them as a subcontractor, or file as a QJV, if they materially participate in the business.

Hiring your spouse as a W-2 employee or a subcontractor would not be recommended in your case because your spouse would owe back taxes and penalties, that would be more than you would save by deducting the wages as a business expense.  

[VolvoGirl]

Your spouse can get SS benefits based on your record.   I think up to half of yours.  Call SS and check with them.

https://www.ssa.gov/OACT/quickcalc/spouse.html 

[Anonymous_]

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@Opus 17 wrote:

It may be possible for you to file amended returns going back 10 years to change your sole prop to a QJV, because it will not result in a refund, it will only change to whom the taxes were assigned.....

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Sorry, but it is not possible to file amended returns to change the sole proprietorship to a QJV on the facts stated; since @FrankinFlorida's wife did not materially participate in the business during those past tax years, a QJV election would not be allowed.

As an aside, an 1120-S is not a partnership return, it is the form used by S corporations (and also entities, including LLCs, that elect to be treated as S corporations for federal income tax purposes). Partnerships and multi-member LLCs (which default to partnership status) file Form 1065.

[Opus 17]

Taxpayer says they were 50/50 with spouse.  Not sure why several experts have concluded the spouse did not materially participate.  

[ee-ea]

A SS earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived.

https://www.ssa.gov/OP_Home/handbook/handbook.14/handbook-1423.html#:~:text=An%20earnings%20record%2....

[Rick19744]

Just so there is no confusion for this specific OP, but also for others that may read this, CPA's enjoy virtually unlimited practice rights before the IRS.  That is not specific to an EA.

An attorney will also have those same rights.

So don't limit your scope for advice to only EA's.

[Anonymous_]

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@Opus 17 wrote:

Taxpayer says they were 50/50 with spouse.  Not sure why several experts have concluded the spouse did not materially participate.  

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Just so the record here is complete, anyone can own anything (in this case, a business) "50/50" and still not materially participate.

In other words, an ownership interest does not automatically mean the owner materially participates.

[FrankinFlorida]

Yes, my wife materially participated since the beginning.  When I said 50/50 I meant that we work together every day in the business and that we are 50/50 partners too in ownership.  Sorry for the confusion.

[Anonymous_]

In that event, you can correct this for the time period indicated by ee-ea.