New Tax Laws That Will Benefit Business Owners
There are many different aspects of the new tax laws that benefit business owners. The major change in the new tax rule is the qualified business income (QBI) deduction.
The QBI deduction was implemented in 2018. With this new rule, there is a potential 20 percent deduction from taxable income based on business income, but it has income limitations. The QBI deductions are used in pass-through entities, such as S corporations, LLCs, sole proprietorships, and partnerships, where the tax is imposed on the personal tax return of the owner and not on the business. In other words, the income “passes through” the business and falls on the individual tax return as a deduction and reduces taxable income.
One of the potential problems facing some gig workers is the hobby loss rule (Internal Revenue Code Section 183). This is triggered when expenses from an activity exceed the income from the activity, and the rule requires all income to be reported but only allows a deduction for expenses to the extent of income. The deduction for these expenses is a miscellaneous itemized deduction subject to the 2 percent-of-adjusted-gross-income. This means that for 2018 through 2025, because of the suspension of this deduction, there is no write-off for any expenses related to a hobby activity. Thus, gig workers must be prepared to show that they are engaging in an activity with a reasonable intention of making a profit, and not for personal pleasure or recreation.
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