Much has been made about how there seem to be fewer deductions since the new tax law changes have gone into effect, but there is welcome news for the self-employed.
This article was originally posted on The Patriot Ledger website.
Much has been made about how there seem to be fewer deductions since the new tax law changes have gone into effect, but there is welcome news for the self-employed. The Qualified Business Income (QBI) deduction is a new deduction for business owners, including self-employed individuals, so be sure to take advantage of it if you can!
The QBI deduction came in response to the reduction the corporate tax rate from 35% to 21%. The government wanted to offer a similar tax cut for businesses organized as pass-through entities and sole proprietorships, and as a result the 20% QBI deduction was born.
Briefly, the QBI deduction is a 20% deduction based on a taxpayer’s qualified business income. To qualify for the deduction, the income must be derived in a trade or business. Income from rental real estate qualifies if rising to the level of a trade or business. Real estate investment trust (REIT) dividends and income from publicly traded partnerships also qualify.
But not every trade or business income is eligible for the 20% deduction. Under the new law, income from “specified service businesses” is generally not eligible for the QBI deduction unless taxable income is less than certain limits. A specified service business is a business that involves the performance of services in the fields of health, law, accounting, actuarial service, performing arts, consulting, athletics, and financial services and investing.
The calculation of the deduction is relatively simple as long as taxable income is less than $315,000 for joint filers or $157,500 for other filers. When taxable income is under those levels, the deduction is equal to 20% of the QBI (including from a specified service business). When taxable income exceeds $315,000 for joint filers and $157,500 for other filers, the calculation gets complicated quickly as other factors (including W–2 wages and the unadjusted basis of property used in the business) come into play.
Let’s look at a simple example. Bob and Mary are married. Bob works as a W-2 employee and Mary has her own consulting business with net income of $75,000. Bob and Mary’s taxable income is less than $315,000. Although Mary’s business is a specified service business, it is eligible for the QBI deduction because taxable income is under the $315,000 threshold. As a result, Mary can claim a QBI deduction of $15,000!
Since the QBI deduction is new for 2018, it may be easy to overlook. Don’t be one of those people who miss out one of the few deductions left!
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.