tax tips — November 30, 2018

Small Businesses and Freelancers, Meet the Qualified Business Income (QBI) Deduction

by Susannah McQuitty

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A freelance photographer aiming for the QBI deduction

Tax reform is the topic of the year, and with most changes officially affecting tax returns soon (just 8 weeks, believe it or not), we want to get you up to speed as soon as possible. Today, that means looking at the qualified business income (QBI) deduction for freelancers and small businesses.

What’s the QBI deduction, anyway?

In the Tax Cuts and Jobs Act of 2017, corporations got some sweet tax rate reductions—but what about the little guys? Taxpayers running small businesses from living rooms and laptops need tax breaks too, so Congress provided a specific deduction for businesses whose income tax is calculated and reported on the owner’s individual tax return.

Individuals who have partnership, S corporation, LLC, or sole proprietorship income can take the QBI deduction without having to itemize deductions. It’s worth 20% of what is essentially your net profit, reducing your taxable income and ultimately saving you money (heck yes!).

The QBI 20% tax deduction is for small businesses and freelancers.

Is there a catch?

There’s not a catch per se, but pass-through entities such as partnerships and S corporations have some extra limitations.

Your total deduction amount cannot exceed the greater of:

  • 50% of the W-2 wages paid, or
  • 25% of the W-2 wages paid, plus 2.5% of the unadjusted basis of all tangible, depreciable trade, or business property that is:
    • Available for use at the close of the tax year
    • Used at any point during the tax year in the production of qualified business income
    • Still depreciable before the close of the tax year

Another limitation goes for Specified Service Trades or Businesses (SSTB). These include any business activity where revenue is generated from a specialized skill or service like health, law or medicine. Unfortunately, the QBI has an income limitation for SSTBs, phasing out at $315,000 for joint filers, $207,500 for head of household filers, and $157,500 for single filers.

A perk for the little guy

Millions of freelancers and contractors out there working for themselves and filing a Schedule C to report income on their tax return now have a 20% net profit tax deduction without having to itemize deductions. That means you can take the QBI deduction and the new standard deduction for your filing status—which is around double what it used to be.

For more info on tax reform, check out our Tax Reform 101 section of the Tax Guide, estimate how reform will affect you with our Tax Estimator App, keep an eye on the blog for more tax tips and news, and don’t forget to file with 1040.com in January!

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