Tax Law Changes for the Self-Employed

Under the Tax Cuts and Jobs Act, small businesses that are pass-through entities may deduct up to 20% of qualified business income on their federal income tax return.

Qualified Business Income

For the purposes of the pass-through deduction, qualified income is defined as total business income minus:

Capital gains or losses
Dividends or interest
Annuity payments
Foreign currency gains or losses
Reasonable compensation for owner/employees of S-Corps
Guaranteed payments to partnerships and LLCs

Pass-Through Entities

Sole Proprietorships, LLCs, S-Corps, and partnerships are known as pass-through entities because income is essentially “passing through” the business to the owner, who claims it on their personal tax return. The business income is then taxed at the owner’s individual income tax rate.

Specified Service Businesses

Specified service businesses are entities that rely on the specific skills of the business owner or employee to make a profit. Examples of specified service business include:

Healthcare providers (doctors, dentists)
Lawyers
Actuaries, and Financial service providers
Performing artists
Consultants
Athletes

Note: engineers and architects are not considered specified service business for the purposes of the pass-through deduction.

20% pass-through deduction thresholds

The income threshold for claiming the full 20% is $157,500 for single filers or $315,000 for joint filers. If your client’s business earns more than the threshold, the deduction becomes 20% of business income or 50% of total wages paid to employees – whichever is less.

The pass-through deduction and rideshare drivers

Rideshare drivers are typically sole proprietors, so if your client drives for Uber or Lyft, they would be considered a pass-through entity and can qualify for the 20% pass-through deduction.

Home office deduction in addition to SALT

A home office deduction would be considered a business deduction and would not be included as part of the personal deduction for state and local property tax. If your client meets the qualifications for the home office deduction, they may take that deduction in addition to the $10,000 deduction for state and local taxes.

Tax Law Changes for the Self-Employed