Are you a self-employed freelancer, contractor or sole proprietor? If so, then you should learn what you can about how the Tax Cuts & Jobs Act, signed into law in December 2017, impacts tax deductions and credits on your 2018 taxes.
1. How do 2018 tax reform changes affect my self-employed business?
There is a 20 percent deduction on self-employed income on net business income. The new law allows a brand-new tax deduction for owners of pass-through entities, including partners in partnerships, shareholders in S corporations, members of limited liability companies (LLCs) and sole proprietors. This deduction allows you to keep more earnings tax-free.
2. What is the 20 percent tax deduction for self-employed filers?
There is a 20 percent deduction on all qualified business income. The taxpayer’s qualified business income is the net amount of business income and deductions for their trade or business. Qualified business income includes:
- Business income from services and from rental real estate.
- Sole proprietorships and pass-through income from partnerships, S corporations, and estates and trusts qualify for this deduction.
- C corporations do not qualify for this deduction.
3. What else do I need to know about this tax deduction?
- It is only on U.S. source income.
- The deduction will reduce taxable income on the federal tax return.
- The deduction only applies for income tax purposes and not for self-employment tax purposes.
- The deduction is limited to 20 percent of the lesser of net qualified business income or taxable income before the deduction and after reduction for any net capital gains.
- The deduction may be phased down based on taxable income.
Although the effect of the phase-out is different for “specified” service businesses and other businesses, the phase-out ranges for both are the same:
- Married filing joint: $315,000–$415,000.
- All other filing statuses: $157,500–$207,500.
4. What is a “specified” service business?
This includes occupations that provide personal services except for engineering and architecture. Examples of “Specified” Service businesses would be:
- Healthcare services performed by doctors, nurses and dentists
- Law, accounting and actuarial services, including anyone preparing taxes
- Performing arts
5. What are the phase-out ranges?
If your business is a “specified service business,” and your taxable income exceeds a threshold of $157,500 for single filers and $315,000 for joint filers, the deduction is reduced pro-rata under the “phase-in rule.”
- The phase-in is complete when income reaches $207,500 for single filers and $415,000 for joint filers.
- Above these upper thresholds, you get no deduction—period.
In other words, taxpayers who have income below the lower income threshold have no worries at all. They are entitled to the full deduction. However, individuals in certain service professions that are traditionally high-paid, such as physicians and attorneys, may not qualify for any deduction. The deduction for taxpayers in other businesses can vary widely.
6. Are the tax rates lower?
Yes, the Individual Tax Rates are lower beginning in 2018 (check your Tax Bracket here). And, because the overall federal income tax rates were lowered for the majority of taxpayers, those who are self-employed will see a further reduction in tax rates when the up-to-20 percent deduction of qualified business income is considered.
7. Is there an increase in business expense tax deduction?
Self-Employed businesses will be able to benefit from an increase of the amount they can expense from the Section 179 amount of $510,000 to $1,000,000 — for business equipment like computers, printers and office furniture. Note a caveat: the maximum allowance is still limited to the amount of income from business activity.
8. Did auto depreciation increase?
The biggest change in deducting automobiles is an increased deduction for car depreciation for cars used for business. This change will most likely result in more business owners buying cars versus leasing.
For autos placed in service after Dec 31, 2017, and for which no IRC 168(k) bonus depreciation is taken, the maximum allowable depreciation is $10,000 for the year placed in service, $16,000 for second, $9,600 for 3rd, and $5,760 for the years after.
9. Can I take tax deductions for business meals and entertainment expenses?
Entertainment expenses: The deduction for entertainment expenses that are directly-related-to or associated with the conduct of business are repealed.
The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.
Meals: Under the Act, taxpayers are still generally able to deduct 50 percent of the food and beverage expenses associated with operating their trade or business.