Small-business owners and independent contractors that often pay higher taxes than corporations are benefiting from the new Qualified Business Income Deduction (QBI), which allows these workers to potentially deduct 20 percent of their income before paying Uncle Sam. For example, an independent contractor who earns $100,000 would deduct $20,000 of that income, paying taxes only on the remaining $80,000.
The QBI was designed to provide some parity for businesses that don’t pay the corporate income tax, which the Tax Cuts and Jobs Act reduced from 35 to 21 percent. Proponents of the deduction say that it levels the playing field between the tax treatment of big corporations and smaller businesses.
Taxpayers who are eligible for the Qualified Business Income Deduction include sole proprietors, S corporations, trusts and estates, and partnerships. Taxable income earned through those businesses qualifies for the QBI if income is below $157,500 for an individual or $315,000 for a married couple filing a joint return. Those making more than these amounts can still qualify, but the IRS imposes restrictions that can require some complicated calculations. As the Tax Foundation noted last year when the law was passed, “The rules for claiming the deduction are relatively complex and will arbitrarily favor certain economic activities over others.”
Regardless of that a lot of self-employed folks are going to be better off in 2018 as they have a business deduction that they didn’t have before.