2018 Tax Changes for Self-Employed Workers

If you’re like many self-employed workers, you’re probably comfortable with digging into the details in order to make the best financial decisions. Where the Tax Cuts and Jobs Act (TCJA) is concerned, there are plenty of details to unpack. To help you sort through it all, we’ve compiled a list of 2018 tax changes for the self-employed.

Top Five Self-Employment Tax Changes for 2018 That You Should Know

Review our list to understand how tax reform affects your self-employment income. Note that each of these revert back to prior law after 2025–except for bonus depreciation, which begins to phase down in 2023.

1. Qualified business income deduction

One new, but significant deduction starting in 2018 that self-employed workers should take note of is the qualified business income deduction. This new provision allows certain business owners to deduct up to 20% of their qualified business income. You can take this deduction if your business is a “pass-through” entity.

Not sure what that term means? Generally, your business is a pass-through entity if you report your income directly on your personal tax return, rather than on a separate return. Examples of pass-through entities are:

  • Sole proprietorships: This is anyone who files a Schedule C (ex. self-employed real estate agents, Uber drivers, freelancers of any kind). Most Stride members are sole proprietors.  

  • S Corps, LLCs, partnerships, and trusts: These are all types of businesses or fiduciary arrangements (in the case of a trust) that have pass-through income. Most Stride members do not have these types of business entities.

So how does the 20% qualified business income deduction work? Let’s say your business has a profit of $50,000. With the new law, you’ll be able to take a $10,000 (.20% x $50,000) below-the-line deduction on your Form 1040.

2. Meals and entertainment expenses

Prior to tax reform, costs that you might have incurred to “entertain” clients could have been deductible as business expenses, such as tickets to sporting events or renting out a facility for entertainment. Now, these expenses are no longer deductible.

What about expenses from a coffee or dinner meeting, or food purchased at a baseball game that you attended with clients?  Don’t worry, even with the 2018 tax changes for self-employed businesses, you can still deduct 50% of the cost of those meals.

3. Increase to bonus depreciation

Bonus depreciation lets you claim a certain percentage deduction in the year you put property into service, allowing you to lower your taxable income beyond regular depreciation.

With tax reform, if you purchase business property between 9/27/17 and 12/31/2022, you can take advantage of new bonus depreciation rules that allow you to:  

  • Deduct 100% of your bonus depreciation. This is an increase from 50%.

  • Take a bonus depreciation deduction on used property. Previously, this was only available for new property.

4. Section 179 limit increase

Another type of depreciation, Section 179 deductions, got a limit increase thanks to tax reform. The TCJA increased the Section 179 deduction limit from $500,000 to $1,000,000. Of course, when you buy property (assets) for your business, you can still choose to either:

  • Deduct the entire cost of the asset, up to $1,000,000 (by taking the Section 179 deduction).

  • Depreciate the asset (deduct a portion of the cost each year, for a set number of years). For example: If the item you purchased, would be in use for five years, you could deduct a fifth of the cost of an asset over a five-year period.

5. Net operating losses

Before the TCJA, businesses running at a loss could carry back their loss to their two prior year tax returns and carry forward the rest of their loss to future tax returns. If you had a loss in year three of running your business, for example, you could use it to offset profits from years one and/or two.

After tax reform, businesses running at a loss can still carry their losses forward to future tax years, but they can no longer carry their loss back to prior year tax returns. Additionally, businesses can’t reduce their taxable income on a modified tax return by more than 80%. This new tax rule could affect many self-employed business owners who are running at a loss.

Are Business Expense Deductions Still Included After Self-Employed Tax Changes?

Yes! All businesses can still deduct their business expenses to reduce their taxable income. Your mileage, phone bill, office supplies, and any other expense categories that you see in the Stride Tax app are still deductible. As always, your expenses need to be ordinary and necessary for your type of business to be deductible.

Note: There was some confusion due to a change with unreimbursed employee expenses when the TCJA was first passed. However, that change doesn’t apply to self-employed taxpayers; it actually has to do with expenses for W-2 employees.

2018 Tax Changes: Help for Self-Employed Taxpayers

Not sure about going it alone on your taxes? You don’t have to with H&R Block’s Self-Employed Online filing product. It’s a simple and easy-to-use program designed especially for self-employed taxpayers.

As part of our partnership with H&R Block, Mike Slack, JD, EA and senior tax research analyst at The Tax Institute at H&R Block will be providing insight on various topics throughout tax season.

Mike SlackComment