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QBI Tax Deduction for Self-Employed Individuals – Did You Know?
If you are a freelancer or otherwise participate in the “gig economy”, you may be able to claim a new tax deduction under the Tax Cuts and Jobs Act (TCJA). The Qualified Business Income (QBI) Deduction applies to self-employment earnings (basically, any income you receive in a setting where you are not classified as an employee). Under the provision, individuals may be able to deduct up to 20% of their self-employment income on their tax returns.
Because the QBI deduction is claimed “above the line,” you can reduce your gross income without itemizing deductions. However, the deduction is subject to a number of rules, including income restrictions for certain self-employment activities, and limits on the size of the deduction relative to your taxable income. A qualified tax advisor can help you understand how these rules apply to your situation.
Saving Receipts to Document Expenses – Did You Know?
For most personal or business expenses that you claim as deductions on your tax forms, the IRS requires that you preserve written documentation of each expense. Acceptable forms of written evidence include receipts, invoices, canceled checks, and credit card and bank account statements. These documents should clearly show the date, location, amount and, if possible, nature of each expense. An experienced tax pro can help you review your supporting evidence to make sure it satisfies IRS rules.
Importantly, your documents need not be originals. Photocopied, scanned or photographed receipts are okay, as long as they clearly show all the information on the original document. However, since you may be required to present your evidence on paper in the event of an audit, you should save digital files in a form that allows you to print hard copies.
In most cases, IRS rules require you to save your written documentation for three years after you file your return. However, if there is any chance that you have omitted income from your tax return that you should have reported, you must maintain your records for six years after filing.
IRS Removes Computers from Listed Property – Did You Know?
Historically, the IRS classified many computers and computer peripherals (such as printers) as “Listed Property.” If your business use of Listed Property is less than 50%, you are usually required to distribute the business portion of the property's cost over your tax returns for multiple years, using a depreciation method that is unfavorable to the taxpayer.
However, computer equipment placed in service after December 31, 2017 has been removed from the Listed Property category. This change in classification makes it much easier to deduct computer costs as business expenses on your tax returns. Under the new rules, you may be able to deduct the business-use portion of the cost of computer equipment put in service in 2018 or later using any appropriate depreciation method, even if your business use is less than 50%.
In particular, you may be able to use the 100% bonus depreciation option that is available through 2022 under the Tax Cuts and Jobs Act (TCJA). This option could allow you to deduct the entire business-use portion of the cost of computer equipment in a single year, usually the year in which you put the equipment into service. If you use your computer for both business and personal tasks, a qualified tax advisor can help you determine the proper business-use percentage to use in order to calculate your deduction.
Six Month Filing Extension Deadlines
If you requested an extra six-month extension in April to file your 2018 personal income tax return, that deadline to file is coming up on Tuesday, October 15th.
If you are an employer that makes contributions into employee Simplified Employee Pension IRA accounts, October 15th is also the six-month extension deadline to make those deposits.
Higher Education Tax Credits – Did You Know?
If you or any of your dependents are enrolled in a higher education program this fall, you may qualify to claim one or more credits on your 2019 tax return.
The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 for a student pursuing a degree or certified credential at a college or vocational school. You may claim the credit for up to four years for each qualifying student, and you may claim multiple AOTCs if you have more than one student in your household. The AOTC is partially refundable, meaning that if your tax is reduced below zero, up to $1,000 of the credit may be refunded to you.
The Lifetime Learning Credit (LLC) is available for household members enrolled in one or more courses at a higher learning institution, or in a qualifying course to develop or improve professional skills. A maximum nonrefundable credit of $2,000 (regardless of the number of qualifying students) may be claimed per year, for any number of years.
Both credits are subject to income limits and other eligibility restrictions. A qualified tax advisor can help you determine your eligibility for both credits.
Age-Limited Child Tax Deductions – Did You Know?
Several key tax credits end when a dependent child reaches a specified age. Here is a quick summary of the age rules for three of the most important tax credits for parents, as well as the most important exceptions:
Child and Dependent Care Credit: Child must be under 13 years of age (12 years old or younger), OR live with you more than half the year and be incapable of self-care.
Child Tax Credit (also called “Per-Child Credit”): Child must be under 17 years of age (16 years old or younger), no exceptions.
Qualifying Child for the Earned Income Tax Credit (EITC): Child must be under 19 years of age (18 years old or younger), OR a full-time student and under 24 years of age (23 years old or younger).
For both the Child Tax Credit and the Qualifying Child for EITC rule, the child must meet the age requirement at the end of the tax year (usually, December 31). However, for the Child and Dependent Care Credit, the child only has to be below the age limit when the care is provided.
If you will lose a tax credit this year due to a child surpassing the age limit, you may need to adjust your withholding to allow for the likely increase to your total tax for the year. A qualified tax advisor can help you determine whether an adjustment is needed.
Teachers, Save Your School Supply Receipts – Did You Know?
If you are a teacher, principal, counselor, or classroom aide who works at least 900 hours a year in a state-accredited school (grades K-12), you may qualify for the Educator Expense Deduction. This IRS rule allows you to deduct up to $250 on your tax forms ($500 for joint filers who are both educators) for classroom supplies that you purchase at your own expense.
Allowed expenses include traditional school supplies like rulers and markers, along with specialty items like athletic gear for physical education classes. A qualified tax advisor can help you determine which of your expenses qualify for the deduction.
You do not have to itemize deductions in order to claim the Educator Expense Deduction, but the IRS does require that you have written evidence for every expense. During this hectic back-to-school period when classroom expenses are most likely to occur, it is important to remember to save your receipts.
Estimated Taxes and Extended Return Filing Deadlines
For individuals and corporations paying estimated taxes throughout the year, September 16th is the deadline for the third quarter installment.
For S Corporations and Partnerships that have an extension on their returns, September 16th is also the deadline for Forms 1120S (S Corporations) and 1065 (Partnerships).
September Tax Checkup – Did You Know?
Making sure that the correct amount of tax is being withheld from your paychecks is the best way to avoid an unpleasant IRS surprise next spring. Here's a simple way to do a September withholding checkup:
- On your pay stub for the pay period ending August 31 or September 1, find your year-to-date federal income tax withholding. If the stub does not have this information, you can request it from your employer's payroll manager.
- Calculate two-thirds (66.67%) of the total federal income tax you paid for tax year 2018. Increase this percentage if you received a raise for (or during) 2019. For example, use 70% if you received a small raise, or 75-80% if you received a substantial raise.
The amount you found in step 1 should be greater than or equal to the amount you found in step 2. If it is not, you can obtain a new W-4 Form from your employer and request that an additional amount be withheld from your paychecks. The IRS also has a withholding calculator that can be found at: https://www.irs.gov/individuals/tax-withholding-estimator.
An experienced tax pro can help you determine what this amount should be. By adjusting your withholding now, you can spread out your tax payments over several months, instead of being stuck with one large, unexpected bill in April.
Taxable Events That Must Be Reported to the IRS – Did You Know?
In addition to traditional income sources like employee wages and business profits, there are a number of other activities and transactions that the IRS classifies as potentially taxable. It is important to consider all of these “taxable events” when you prepare your returns.
Some of the most commonly overlooked taxable events include:
- Investment income, including receiving stock dividends or cashing in bonds
- Converting a traditional IRA to a Roth IRA
- Forgiveness (discharge) of a loan or other debt, including student loans
- Sale of assets such as vehicles, musical instruments, or a home at a gain (that is, for more than you paid to purchase the assets)
- Sale or exchange of cryptocurrency (like Bitcoin), or making purchases with cryptocurrency
- Withdrawing funds from a retirement plan (or from the cash value of a life insurance policy if you withdraw more than you have paid in premiums)
- Gifts and inheritances
An experienced tax professional can advise you about which events in your life may have tax implications, and how to properly report those events. For example, in some cases, you may only need to declare the event to the IRS if the amount of money involved exceeds a minimum threshold, known as an “exclusion.”
Deductions for Meals & Entertainment – Did You Know?
The Tax Cuts and Jobs Act (TCJA) of 2017 changed the rules for deducting meal and entertainment expenses on business tax forms. For the most part, the 50% deduction for meals directly connected to the conduct of your business remains intact, as long as the expense is not extravagant. However, the deduction for entertainment expenses has been eliminated, with only a few very specific and rare exceptions.
Applying the new law can get complicated, because entertainment activities such as attending a basketball game often include the purchase of food. To find out if your meals associated with an entertainment event still qualify for the 50% deduction, you may need to consult a tax advisor with extensive knowledge of business tax rules. Most importantly, the TCJA expressly forbids reporting entertainment expenses under another expense category (such as advertising) in order to claim a deduction.
Business or Hobby – Did You Know?
If you derive income from any activity where you are not an employee, from occasional dog sitting to playing guitar for tips at your local coffee shop, then the IRS requires you to classify the activity as either a hobby or a business on your tax returns. Importantly, this decision must be based on IRS rules governing what constitutes a business, not on how you personally view the activity. If you are unsure how those rules apply to you, a qualified tax advisor can help.
If your project is reported as a business, you may be able to deduct almost all expenses related to the project, even if those expenses result in a net loss some years. However, your net business income (profit) will be subject to self-employment tax. Meanwhile, hobby income is exempt from self-employment tax, but the Tax Cuts and Jobs Act (TCJA) eliminated most deductions for hobby-related expenses. Generally, if an endeavor involves very little expense and accounts for a small percentage of your annual income, it is probably best to report it as a hobby. In many other cases, you may be surprised to learn that you can, or even must, call your favorite hobby a business—and that doing so has significant tax advantages.
Itemized Deduction for Medical Expenses – Did You Know?
If you itemize deductions on your federal tax return, you may be able to deduct medical expenses that were not reimbursed by insurance. For tax years 2019 and beyond, your medical expenses must exceed 10% of your adjusted gross income (AGI) in order to qualify for the deduction.
Examples of deductible expenses can include oxygen tanks, contact lenses or eyeglasses, indoor or outdoor lift chairs, and lead-based paint removal if you have a child in your home. If anyone in your household depends on a powered medical appliance such as a CPAP machine or lift chair, you may also be able to deduct part of the cost of a backup generator to keep these appliances working during a power outage.
Who Must Pay Estimated Tax - Did You Know?
The IRS states that federal taxes must be paid on a "pay as you go" basis, not just at the end of the tax year. This means that if you receive significant income that is not subject to withholding, it is likely necessary for you to make estimated tax payments throughout the year. In addition to those who officially classify themselves as self-employed, many people who participate in the "gig" and/or "sharing" economy must also make these payments.
For example, if you drive for a rideshare service, rent out a spare room to travelers, or work for a few hours a week as a freelance dog walker, your income from those activities may be taxable. Because you don't have an employer who withholds tax from paychecks, you must essentially handle the withholding yourself by making an estimated tax payment each quarter.
However, if you receive both employee income subject to withholding and additional, "side gig" income, you may be able to avoid making estimated tax payments by increasing the amount withheld from your regular paychecks. A qualified tax advisor can help you determine how much tax you are likely to owe, and whether it is more advantageous to adjust your withholding or make estimated payments.
Standard Mileage vs. Actual Vehicle Expense Deduction – Did You Know?
If you use your car, van or truck for business purposes, you may be able to claim a vehicle expense deduction on your tax return. You may either use the standard mileage rate or report the actual expenses associated with business uses of the vehicle. Actual expenses include gas, repairs, insurance and depreciation. Each expense must be prorated based on how much you use the vehicle for business rather than personal purposes, so extensive record keeping is required.
Claiming the standard mileage rate, on the other hand, requires only tracking the number of miles you drive for business purposes throughout the year. Simply multiply your yearly mileage total by the standard rate, which will be 58 cents per mile for 2019.
As a broad rule, the standard rate may yield a larger deduction for fuel-efficient and older vehicles, whereas deducting actual expenses may be advantageous for many newer vehicles. However, in order to be able to choose the method that gives you the largest possible deduction each year, you must use the standard rate for the first year that the vehicle is used for business.
IRS Private Debt Collectors - Did You Know?
The IRS may assign certain cases of overdue debts to private debt collectors, but only after giving written notice. Any payment to the private debt collectors should only be made payable to the U.S Treasury.
There are currently only four contractors authorized for collection: CBE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, Calif.; and Pioneer of Horseheads, N.Y.
Qualified Business Income Deduction – Did You Know?
The Tax Cuts and Jobs Act (TCJA) created a new deduction for many taxpayers with business income. The Qualified Business Income (QBI) deduction applies to income derived from “pass-through entities”—businesses whose earnings are reported on individual owners' tax returns rather than corporate returns. If you are a sole proprietor, partner, LLC owner, or shareholder in an S corporation, you may be eligible to claim the deduction.
If you qualify, you may be able to deduct a portion of your business earnings from your adjusted gross income (AGI) on your tax forms. Because the QBI deduction reduces your taxable income, it may result in significant tax savings.
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