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Tax Changes for Self-Employed Businesses That Could Impact Your 2018 Return

Are you self-employed? Are you confused about what all this “qualified business income” information means to you and your 2018 tax return?

Don’t stress, you are not alone.

It’s no secret there are a lot of changes to the 2018 Tax Return. Recently, we shared the article, “5 Biggest Changes You Need to Know About Before Preparing Your 2018 Tax Returns,” to address some of these changes that could affect how you file.

NECB Dean of Undergraduate Studies and Tax Expert, Donna Viens, has been receiving a lot of inquiries with regards to being self-employed and filing taxes. To help shed light on the changes and how they can affect you, here is what you need to know:

Beginning in 2018, individuals who file as “self-employed pass-through entities” can take a 20% deduction on their qualified business income.

What does this mean?

First, a “self-employed pass-through entity” can be someone who is a sole-proprietor and files a schedule C or it could be a partner in a partnership, shareholder in an S corporation or a member of a limited liability company.

Note: C corporations do not qualify for this deduction.

QBI (Qualified Business Income) is the net amount of money you make from running your business. The 20% is limited to the lesser of net qualified business income OR taxable income before deductions and after reduction for any net capital gains.

Note: The deduction only applies for income tax purposes. This means you will still pay self-employment tax on all of the income.

As always, the IRS loves stipulations and the most important stipulation for QBI is if your business qualifies.

Ask yourself…

Are you a “specified service trade or business” (SSTB)?

  • An “SSTB” includes trades or businesses involving the performance of services in the fields of:
    • Health
    • Law
    • Accounting
    • Actuarial Science
    • Performing Arts
    • Consulting
    • Athletics
    • Financial Services
    • Investing and Investment Management
    • Trading
    • Dealing in certain assets

In other words, any trade or business where the principal asset is the reputation or skill of one or more of its employees.

If you answered yes to the above question, now ask yourself does your taxable income exceed $315,000 for a couple filing married jointly or $157,500 for all other taxpayers?

  • If you answered YES, your deduction is the lesser of:
    • 20% of the taxpayer’s QBI, plus 20% of the taxpayer’s qualified real estate investment trust dividends and qualified publicly traded partnership income OR 20% of the taxpayer’s taxable income minus net capital gains (HINT—GET AN ACCOUNTANT).
    • If you answered NO, you qualify for the 20% QBI deduction!

Additional changes for businesses this year include:

  • Auto Depreciation: This has increased. For autos placed in service after December 31, 2017 you can take a maximum depreciation of $10,000 for the year placed in service and $16,000 for the second year!
  • TIP: Recheck your numbers, leasing might not look as appealing as it once did!
  • Entertainment Expenses: You can no longer entertain customers and expense those costs. The deduction for entertainment expenses has been disallowed. Therefore, if you take a client to a club organized for business, pleasure, recreation, or another social purpose or to an activity deemed for entertainment, amusement or recreation, you cannot deduct the cost. So, don’t book those Red Sox tickets and expect to write them off!
  • Meals: Still deductible at 50% but remember to write on the back who the client was and the purpose of the meeting. And as always, keep those receipts!
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