Business Tax Tips
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.
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.
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.”
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.
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.
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.
Starting on Jan. 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
– 58 cents for every mile of business travel driven, an increase of 3.5 cents from the rate for 2018.
– 20 cents per mile driven for medical or moving purposes, an increase of 2 cents from the rate for 2018.
– 14 cents per mile driven in service of charitable organizations.
You also have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.
If you are a business owner, the new tax law not only retained the section 179 deduction for certain types of equipment and other business purchases, but the limit was also expanded to $1 million for 2018. This rule allows the amount of these purchases to be expensed right away versus depreciated over a number of years. This can be a significant tax benefit for a company.
In order to qualify, the equipment or software purchase must be used for business use more than 50% of the time.
If you travel away from home for business purposes and you schedule business activities and meetings on Friday and then on Monday, you may be able to claim the weekend in-between as business time and your hotel and meal expenses are deductible as such.
However, if you only had business-related activites on Friday, and just went home on Monday, the weekend in between would not be counted as business days.