Brian Basinger’s phone started ringing almost before the ink dried on the Tax Cuts and Jobs Act passed by Congress in late 2017.
A certified public accountant, Basinger said his clients, which include entrepreneurs, small businesses and independent contractors, were and are clamoring to know how the sweeping tax code overhaul affects their tax bills.
“It’s been a huge topic this whole past year,” said Basinger, founder of the Park City, Utah accounting firm, Basinger CPA. “For the most part, people still aren’t sure how it’s going to affect them. And bottom line, they want to know will they pay more or less tax.”
Answering that question was hard to do when the law went into effect, said Lisa Greene-Lewis, a California-based CPA and a tax expert at Turbo Tax. None of the headlines focused on small businesses, a label that for tax purposes applies to contract workers who earn their living in the 1099 economy.
“I did see that people were thinking [the tax law] only benefited corporations,” she said. “That’s a myth.”
In fact, Greene-Lewis and Basinger say, the law’s across-the-board lower tax rates along with a few new business expense deductions offer some real benefits and savings for independent workers. Topping the list of benefits is a new qualified business income deduction, which allows some independent contractors and freelancers to take an additional 20 percent tax deduction on top of their regular business expense deductions. That could result in a further reduction in your tax rate, because of the overall reduction in federal tax rates and other business income provisions for self-employed individuals that the new law provides – specifics you should check with your tax preparer.
There are some limitations, but in general, the deduction is available to those earning up to $157,000 if they are single or $315,000 if married filing jointly, Greene- Lewis said.
“That’s a real benefit,” she said. Independent workers may also benefit from the new rules related to business expenses, including marketing and advertising costs, auto expenses, equipment purchases, health care and more, Greene-Lewis said.
Here’s a rundown of some of those deductions from Internal Revenue Service fact sheets.
Home office deduction: Prorated, based on the size of your home and office, deductions can include expenses such as mortgage or rent, insurance and utility bills.
New equipment: The new law increases the immediate expensing and a bonus depreciation percentage for equipment and property like computers and software to office furniture and even a vehicle from 50 percent to 100 percent, with some limitations.
Business expenses: Deductible expenses can range from business meals and travel to gas, rent, postage and shipping. In the meals and entertainment category, however, the IRS has changed the rules for clients’ entertainment. Past deductions, like tickets to a sporting event or concerts, have been eliminated. Write-offs are allowed for business meals with clients (50 percent of costs) as are 100 percent of the cost of travel to meet with clients or go to a conference.
Education and training: Costs for work-related education directly tied to your self-employment status can be deducted as a business expense, including tuition, books, supplies and transportation.
Automobile expenses: In addition to mileage deductions, the law also allows filers to deduct expenses like gas, oil, parking, insurance, lease payments, registration, tires and more. In addition, depreciation deductions have been increased, Greene-Lewis said, to over $40,000 in the first four years of using your car. A $25,000 deduction is also allowed for SUV’s weighing less than 14,000 pounds that are purchased and used for business at least 50 percent of the time, she said.
Medical expenses: Also under the new law, most freelancers, can now deduct out-of-pocket pocket medical expenses that total 7.5 percent of adjusted gross income. For those who bought their own insurance, the deductions now include premiums and self-employed workers can also deduct supplemental Medicare premiums.
Despite the improvements in some deductions and lower tax rates, both Greene-Lewis and Basinger say the details matter. Filers should be looking for expert advice, whether that means talking with a tax professional or using software like TurboTax to make sure they meet the threshold requirements in the new laws.
Basinger also recommends taking a close look at how your business is incorporated.
“Before, it was standard protocol to put small business, and that includes independent contractors, into an s-corp,” he said. “That’s often still the right choice, but it may make sense to switch to an c-corp now because the corporate tax rate was lowered significantly.”
Filers should also remember that lower tax rates and improved deductions allowed under the new law might mean a boost to their bank accounts.
“It could amount to a lower tax liability,” she said. “But not necessarily a tax refund.”
The information contained within this article should not be a replacement for tax advice from your personal accountant or tax professional.