Small Business Tips

How to File Taxes When One Spouse Owns a Business

Stephen Fishman
Tax expert and contributor MileIQ

When tax season arrives, married couples have an important decision to make: file jointly or file separately. Most spouses assume filing jointly offers the greatest tax deduction. And 9 times out of 10 that’s probably the case. But what if one spouse owns a business and the other is a full-time W2 employee? Does filing jointly still make sense? The answers to these questions are crucial to understanding before you sit down with a tax professional. Though your accountant is there to guide you, it’s best to have a clear perception of which filing status is best for you.

Here are key takeaways to consider before the MileIQ tax experts dish out the facts and figures:

  • If you’re married and own a business, this will affect your personal tax return.
  • If one spouse owns a business, they are known as the owner-spouse.
  • Filing individually is rarely the better tax deduction.

Does it matter which type of business I claim?

The type of business return you file and whether you decide to file jointly are separate matters. Most small business owners are sole proprietors by default with a licensed limited-liability company (LLC). The IRS filing requirements in this case are with a Schedule C, which lists business income and deductible business expenses. You may also file under the following claims:  

  • S corporation (Form 1120S)
  • C corporation (Form 1120)

Either way you claim, the decision for your spouse to file separately or individually will come down to your overall tax outlook. The fact that the business-owner spouse is married doesn’t make much difference as far as business taxes go. The owner-spouse gets treated like any other sole proprietor. The owner gets to deduct any ordinary and necessary expenses incurred to run the business. Examples include business travel and mileage, an outside or home office, equipment, business insurance, and other business expenses.

Are there any exceptions?

But, the fact that one spouse is an employee can have a considerable impact on one important business deduction. That is to say, the first-year expensing deduction. This deduction is also called the Section 179 deduction, based upon the Internal Revenue Code section establishing it.

Section 179 allows you to deduct the full cost of equipment and other long-term assets in a single year rather than depreciating it over several years. But, you may deduct no more than your net taxable business income for the year. If the value of the assets you purchase exceeds your net business income, you have to deduct the excess amount in the following years.

However, for Section 179 purposes, net business income includes your spouse’s employee income. So, if your business income is low, you can add your spouse’s employment income to it to increase your Section 179 deduction for the year.

How do I file taxes if my spouse owns a business?

If one spouse owns a business, they are known as the owner-spouse and are required to fill out specific tax forms like Schedule SE or Form 8829 to report related business expenses. The non-owner spouse is not required to complete this type of documentation. The point where both spouses come together is deducting personal expenses. You have two options for doing this:

  • Personal itemized deductions (medical expenses, home mortgage interest, property taxes, and charitable contributions)
  • Standard deduction  

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Will the owner-spouse affect our standard deduction?

The fact that one spouse has a business and one is an employee will not impact a standard deduction. This is why filing jointly still works in your favor. Although you won’t be able to claim actual expenses, like mortgage costs, the owner-spouse can still claim a home office deduction on Schedule C form.

Example: Ed and Edna are a married couple. Ed has a home business as a freelance app developer. Ed and Edna pay $12,000 per year in property taxes on their home. Ed used 25% of the home as an office for his business. This enables him to deduct $3,000 of his property tax (25%) as part of his home office deduction on his Schedule C.

Ed and Edna deduct the remaining $9,000 as a personal itemized deduction on their Schedule A. Let’s say Ed did not have a home office, then the couple would only be able to deduct $10,000 of their $12,000 in property tax as a personal itemized deduction.

Should I file separately if my partner owns a business?

Although the final say is ultimately up to you, the decision to file separately means you won’t be eligible for certain tax credits. This is something to keep in mind especially if you are leaning towards filing separately. If you’re married and decide to file on your own, you’ll lose the opportunity to claim the Earned Income Tax Credit (EIC), child tax credit, American Opportunity Credit, and Lifetime Learning Credit for continued education costs. It’s worth noting that you’ll also miss out on the student loan interest deduction.

In most cases, we’d encourage spouses to file jointly to take advantage of these tax credits. And now that you know business ownership doesn’t affect your tax deduction, you can file with better peace of mind. However, there are some circumstances where it makes sense to file separately from your spouse. If both spouses are high-income earners and essentially fall in the same tax bracket, you might be better off filing separately. Perhaps the most common reason why spouses choose to file individually is to limit their liability for the other spouse’s tax mistakes.  

Generally speaking, you’ll know the right decision to make when assessing all these factors. Just remember, the owner-spouse gets treated like any other taxpayer.

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