If you’re a freelancer in Salt Lake City, you know that it’s important not to leave money on the table when you do your taxes.
Enter the Qualified Business Income (QBI) deduction. While the Tax Cuts and Jobs Act of 2017 that made some sweeping changes to American taxes have been criticized for being most favorable to big business, the QBI is actually aimed at the smaller entrepreneur and self-employed individual. Here’s what it means for you.
You Get 20% Off Your Qualified Business Income
Known as the Section 199A deduction, the QBI deduction is currently valid for tax years 2018 to 2024. You don’t have to take any special action to get it, either. All you have to do is operate any kind of pass-through entity, whether that’s a sole proprietorship, partnerships, limited liability company or an S-corporation.
The deduction doesn’t reduce your business income, nor your net earnings for self-employment tax when you’re self-employed. Nor, like ordinary business expenses, does it reduce your gross income. Instead, it comes directly off your adjusted gross income — which effectively reduces the tax rate you pay on your business profits.
Say, for example, that you make a $10,000 net profit from your graphic design work. The QBI deduction lets you take 20% off that income, so instead of paying taxes on all $10,000, you’d only pay taxes on $8,000.
No Special Forms Are Necessary
Most tax breaks require a lot of paperwork. The QBI, however, is a welcome relief for folks who are wary of itemizing everything and struggling through different pieces of paperwork while they complete their taxes. The electronic tax programs that most people use to file their taxes and the paper forms alike are now designed to capture the deduction and apply it once you fill out your Schedule C.
Are there any limitations? Naturally. No tax code would be complete without a few. You can’t include capital gains and losses, dividends, interest income and compensation paid to S-corp owner-employees. There’s also a threshold test. The deduction caps out at $157,500 for single filers and $315,000 for those filing jointly.
You Can Find Help Here
If you’re ready to file your taxes in Salt Lake City, Ogden or the surrounding area or are trying to get a head start on next year, McKay Tax & Accounting can provide you with the sort of individualized service that you need to ease your mind — whether you’re a one-person operation or the head of a growing enterprise. Contact our office today for more information.