Currently, there are about 55 million people in the self-employed community and with one in five taxpayers becoming self-employed every day, that number is expected to grow.
If you have taken the plunge into being a business of one or considering it you may be wondering how the new tax reform law passed in December 2017 impacts you. The first thing to note is that the majority of the tax law changes impact your tax year 2018 taxes (the ones you file in 2019).
Whether you’re an Uber or Lyft Driver, a freelance blogger, or a contractor, TurboTax has you covered with tools, products, and tax experts to help you understand what the new tax law means to you and gives you confidence that your taxes are done right.
Here is a breakdown of what the new tax law means to you and some of the biggest changes for those who are self-employed:
20% Qualified Business Income Deduction
If you are a freelancer, independent contractor, or have a side-gig you may receive a 20% Qualified Business Income Deduction on your qualified business income, saving you money for your business.
For instance, a single Uber driver, without kids and earning $26,000, will see about $623 tax savings on their 2018 taxes due to the 20% deduction from Qualified Business Income, which further lowers their tax liability.
Qualified Business Income (QBI) is the net income (profit) from your business and is determined by subtracting all your regular business expenses from your total business income. In order to get the 20% Qualified Business Deduction, you need positive taxable income after taking all of your income and deducting all of your deductions, including the standard deduction. In addition, your Qualified Business Income Deduction can’t exceed 20% of your taxable income.
The Qualified Business Income Deduction is also subject to a few limitations based on the type of income, type of trade or business you are in, and the amount of net income you earn, but in general, the deduction is available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.
If your income is above the $157,500/$315,000 taxable income thresholds, your 20% QBI deduction may be limited if your business is considered a service type business like the health, law, or accounting category to name a few. Any business where the principal asset is the reputation or skill of the owner is also included.
Recently, the IRS issued proposed regulations on the new 20% Qualified Business Income Deduction, but we’ll continue to keep you updated on any updates from the IRS.
Increase in the Section 179 Business Expense Deduction
If you buy equipment for your business you may be able to benefit from an almost doubling of the amount you can expense from the 2017 Section 179 amount of $510,000 to $1,000,000 for qualified business equipment like computers, printers, and office furniture. The amount you can deduct is still limited to the amount of income from business activity.
Have you purchased an SUV for your business? If you purchased a six-passenger vehicle under 14,000 pounds, you can deduct up to $25,000 in the first year you purchased the vehicle for your business if you use it at least 50% of the time for business.
Increased Depreciation Expense Deduction for Business Vehicles
Another perk to using your car for your business is that you’ll see an increase in the maximum allowable depreciation expense which further reduces your taxable self-employment income. Also, if you bought a new car for your business in 2018, you may be able to depreciate over $40,000 in the first four years
Lower Individual Tax Rates
Because the overall federal income tax rates were lowered for taxpayers, you may see a further reduction in tax rates when the up to 20% Qualified Business Income Deduction is considered. This is because business income that passes through to someone who is self-employed or to an individual from a pass-through entity will be taxed at individual tax rates less the deduction of up to 20% to bring the tax rate lower.
Don’t worry about knowing every detail of the new tax law. TurboTax has you covered and is an expert in tax providing you with tools, products, and tax experts to help you file with confidence. TurboTax Self-Employed will ask you simple questions about you and your business and uncover business expenses you didn’t know were possible based on your entries. And if you have a tax question, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered from the comfort of your couch.
Want to see how the new tax reform law impacts you? You can input your 2017 information in the TurboTax TaxCaster app and get a side-by-side comparison to see how the new tax reform law impacts your 2018 taxes.