The following article was featured on the Patriot Ledger. You can view the original article by clicking here.
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 deduction is a new deduction for business owners, including self-employed individuals, so be sure to take advantage of it if you can!
The deduction came in response to the reduction the corporate tax rate from 35 percent to 21 percent. 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 percent QBI deduction was born.
Briefly, the deduction is a 20 percent 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. REIT dividends and income from publicly traded partnerships also qualify.
But not every trade or business income is eligible for the 20 percent deduction. Under the new law, income from “specified service businesses” is generally not eligible for the 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 percent of the deduction, including from a specified service business. When taxable income exceeds $315,00 for joint filers and $157,500 for other files, the calculation gets complicated quickly as other factors (including W2 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 qualified business deduction because taxable income is under the $315,000 threshold. As a result, Mary can claim a deduction of $15,000.
Since the 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.