Joint Ventures: Tax Considerations

Contractors use joint ventures for a variety of reasons, including:

  • Bidding on work they otherwise could not complete (spreading risk), or jobs requiring minority or other special business enterprises;
  • Securing bonding or financing to obtain and perform work;
  • Specialization not within the contractor’s expertise; and
  • Increasing access to local markets and global reach.

This article provides an overview of some tax issues facing joint ventures. v

Tax Structure

According to IRC section 761, a “partnership” includes “… a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on.” For tax purposes, the typical structure of a joint venture is taxed as a partnership.

If a separate entity is established under state law, it is generally considered to be a “pass-through,” similar to a limited liability company (LLC), or a partnership – whether that is a general partnership (GP), a limited partnership (LP), or a limited liability partnership (LLP). If a separate entity is not established, then the code, regulations, and case law provide when a partnership exists.

In 1997, the IRS established the “check-the-box” system, which allows taxpayers to select the methods of taxation by choosing the appropriate entities for tax purposes. In the domestic construction industry, an LLC or partnership is usually established and taxed as a partnership in order to avoid trust or corporation issues. Unlike most pass-through entities, corporations may face two levels of taxation – hence the propensity for partnership taxation.

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