What Tax Deductions Can Self-Employed Workers Claim Under the New Law?

For self-employed individuals, the 2018 tax law changes eliminated many deductions for traditional employees but introduced significant new benefits, including the Qualified Business Income (QBI) deduction, which allows a 20% write-off on eligible business income.

The Tax Cuts and Jobs Act fundamentally altered the tax landscape for American workers. Mark Steber, Chief Tax Officer at Jackson Hewitt, states, “2018 is a fundamentally different tax year, so you need to know the new rules.” While salaried employees (W-2 filers) can no longer deduct unreimbursed work expenses, self-employed workers retain access to a wide range of business expense deductions. Lisa Greene-Lewis, a CPA and Tax Expert at TurboTax, confirms that independent professionals can still deduct many costs, with the QBI deduction being a major new advantage.

What is the Qualified Business Income (QBI) Deduction?

The Qualified Business Income (QBI) deduction is a tax break specifically for pass-through businesses, such as sole proprietorships, partnerships, and S corporations. It allows eligible self-employed individuals to deduct up to 20% of their net qualified business income from their taxable income. For example, if your business earned a net profit of $100,000, you could potentially deduct $20,000. It's important to note that this deduction begins to phase out for single filers with taxable income above $157,500 and for married couples filing jointly with income above $315,000. This deduction is claimed directly on your personal tax return and does not reduce your self-employment tax.

How Can You Deduct Vehicle and Transportation Expenses?

If you use a vehicle for business, you have two methods for claiming deductions. The simpler method is the standard mileage rate, which for the relevant tax year is 58 cents per business mile driven. The alternative is the more complex actual expense method, where you deduct the business-use percentage of all vehicle costs, including fuel, repairs, insurance, and depreciation. Based on our assessment experience, the actual method often yields a larger deduction but requires meticulous record-keeping of all expenses and mileage. The IRS requires detailed documentation, such as a mileage log and receipts, to substantiate your claim in case of an audit.

What Other Key Deductions Are Available for the Self-Employed?

Beyond transportation, self-employed workers can deduct several other ordinary and necessary business expenses.

• Business Travel: Airfare, hotels, rental cars, and 50% of client meals during business travel are deductible. However, entertainment expenses, like concert tickets, are no longer deductible.
• Home Office: If you have a dedicated space used exclusively for business, you can deduct a percentage of your home expenses like utilities and insurance. The calculation can be based on the square footage of the office or by using the simplified method, which offers a deduction of $5 per square foot (up to 300 square feet, for a maximum of $1,500).
• Business Equipment: Computers, printers, and software necessary for your business can often be fully deducted in the year they are placed in service, through a process called Section 179 expensing or bonus depreciation.
• Other Deductions: Fully deductible expenses also include health insurance premiums, professional dues, licensing fees, and work-related education that maintains or improves skills needed for your current business.

To maximize your deductions and ensure compliance, maintain detailed records of all business expenses throughout the year and consult with a qualified tax professional. The rules are complex, and professional advice tailored to your specific situation is invaluable. For more insights on managing your career and finances, you can find resources on sites like ok.com.