Over the holidays I wore three hats: a Santa Clause hat, a blogger hat, and a CPA hat.
🎅 My Santa Claus hat compelled me to give gifts to friends and loved ones on the nice list.
🤓 And my CPA hat compelled me to skim through the Republican tax bill known as the Tax Cuts and Jobs Act of 2017 a.k.a. “the new tax law.”
Self-Employed People Will Greatly Benefit
If you make money from your own business, either part-time or full-time, then you’re in luck.
Although the new tax law will give most Americans a tax cut, taxpayers who are self-employed stand to benefit even more than those whose only income is from a W-2 job.
So here are 3 tips for bloggers and other self-employed people to take advantage of the new tax law.
💰 1. Ask your tax advisor about the new 20% pass-through deduction.
The new tax law includes a new deduction on 20% of your net income from “qualified business income.”
“Qualified business income” includes income you make that “passes through” to your individual return, such as income you make as a sole proprietor (i.e., you file Schedule C), from an S corporation, or from a partnership.
If your business exists in a C corporation, it doesn’t qualify for this deduction.
Here’s an example.
Let’s say you’re a self-employed blogger, and these are your numbers for 2018:
- Blog revenue “R” = $100,000
- Blog expenses “E” = $40,000
- R – E = Blog net income = $60,000
Previously, you would pay tax on that full $60,000 of income.
Now, however, you get to deduct 20% of your blog’s net income (what you actually earned) when calculating your blog’s taxable income (what you’re taxed on)!
So in the example above, 20% of $60,000 gives you a $12,000 pass-through deduction, so you would only have to pay tax on $48,000 of income (even though you netted $60,000!).
So how much in real savings are we talking about?
How much will you save in taxes? Well, that depends on your tax bracket.
Let’s say you’re married and between you and your spouse, here are your numbers for 2018:
- Salaries “S” = $250,000
- Blog “B” = $60,000 (see example above)
- “S”+ “B” = Total income = $310,000
$310,000 in income for a married couple filing jointly places you in the 24% tax bracket.
The math is slightly more complicated than this, but the gist is that the $12,000 pass-through deduction in the example above times your 24% marginal tax rate is $2,880, meaning that you will save nearly $3,000 in taxes just from this deduction alone!
Pretty cool, eh?
It gets complicated.
However, if you make more than $157,500 as a single filer or $315,000 as a married filer, your ability to take this deduction may be limited if not eliminated.
And if you make more than these threshold amounts, it might make sense for you to be taxed as a corporation, depending on how much of your business earnings you plan to use to fund your lifestyle and how much you plan to reinvest into the business.
There are a few other ins-and-outs to this pass-through deduction, so be sure to check with your tax advisor.
🏠 2. Take the home office deduction.
In 2017, Caroline and I paid over $35,000 in state income and personal residence property taxes, so while I was happy that the new tax law will get us out of paying the Alternative Minimum Tax, that joy was short-lived since the new tax law caps the itemized deduction for state, local, and personal residence property taxes at $10,000.
But here’s the deal.
This new $10,000 limitation is only for personal state, local, and property taxes.
Business state, local, and property taxes are still as deductible as ever without limitation.
Reclassify some of your household expenses as “business.”
So our strategy for 2018 is to ramp up our self-employment income and dedicate a portion of our house to be my home office where I work on this blog and CPA services and another portion of our house as Caroline’s hair and makeup studio.
This will allow us to deduct on Schedule C through the home office deduction a portion of our property taxes that we wouldn’t be able to deduct otherwise.
The home office deduction lets you deduct a portion of your household expenses (such as your mortgage, property taxes, insurance, repairs, etc.) to the extent you used your home for your business.
Is the home office deduction an IRS audit red flag?
Now for some reason, the home office deduction has a bad reputation from old-time CPAs.
However, based on discussions with more — ahem — contemporary CPAs, it is my belief that this bad reputation is no longer warranted.
Just make sure you don’t abuse the law and work with a qualified tax professional.
🖥️ 3. Upgrade your equipment.
Let’s say you own a business and you buy a new piece of equipment, say a computer, for $1,000, and you use it exclusively for your business.
Without the provisions in the tax code known as “Section 179” and “bonus depreciation,” you would only get to deduct a little bit of what you paid for that computer every year for 6 years through “regular depreciation.”
In the case of a $1,000 computer, you could only deduct $200 in the year you bought it, $320 the next year, $192 in the year after that, etc.
Section 179 Expensing
However, thanks to the Section 179 expensing rules, you can deduct the $1,000 in full this year.
But there’s a catch.
If your business is in a loss for tax purposes — as many small businesses are in their first few years — then you won’t get to take advantage of Section 179 expensing this year. You have to carryforward your excess Section 179 expense to future tax years.
Bonus depreciation, however, lets you increase your taxable loss that you can use to offset against your other income, such as your salary from your day job.
And for the past few years, the government has generously let business owners take 50% “bonus depreciation” on equipment and other assets they use in their business.
This means that on a $1,000 computer, you could immediately deduct $500 “bonus depreciation” and $100 normal depreciation, then in the year after that $160, then in the year after that $96, etc.
The new tax law, however, allows for 100% bonus depreciation.
That means if you buy a $1,000 computer and you use it exclusively in your business, then you can take the full $1,000 deduction in the year you bought it, and if your business has a tax loss, you can even use your loss to offset your other income!
So if you’ve been meaning to buy some new equipment for your business, now might be a good time to do it.
Of course, there are special rules here, especially if you are going to be using equipment for both personal and business use. As always, check with your tax advisor.
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