Sole Proprietorship Tax Question

[ooeei]

I know this doesn't apply to taxes being filed this year, but I'd like to have an idea what to expect next year.

My girlfriend currently has a few different jobs:

• A W-2 Job making $30k/year
• A side job where she is paid by 3 different clients through 1099s making ~$30k/year
• A different side job where she is paid by a client through a 1099 making ~$10k/year

Until now we basically deducted any work related expenses she had from the 1099s and paid taxes on the remainder. The new tax format has me a bit confused on a few details. Below is what I THINK is correct.

• She is eligible to claim her 1099 income as a sole proprietorship
• 20% of the income from said sole proprietorship can be deducted per the new regulations
• She makes less than $157k as an individual, thus there are no W2 limits on said deduction
• She makes $40k through the 1099 jobs after expenses, thus will only pay taxes on $32k ($40k-20%) from said jobs

What I'm not 100% clear on is whether work expenses such as travel or office supplies from her 1099 jobs can be deducted when calculating her QBI (qualified business income). If she has $10k in expenses, but makes $50k gross, her QBI would be $40k, is that correct?

Her friends who work in similar businesses are freaking out about the removal of work related deductions for employees, but since she is not an "employee" that doesn't apply to her, right? She is only restricted from deducting workplace expenses related to her W2, right?

[jwright]

Qualified Business Income is the *net* amount of qualified items of income, gain, deduction or loss from a qualified trade or business, so yes you are correct.   

[Evgenia]

Yes: Her work expenses from her 1099 jobs can be deducted when calculating her QBI. I won't venture to speak to the specific calculation but, essentially, those side gigs are a business and she can deduct all qualified expenses.

Yes: Since she is not an "employee" at those side gigs, the loss of employee deductions doesn't apply to her in the same way. She would only be restricted from deducting workplace expenses related to her W2, not her 1099s, per above.

[ooeei]

Great, thank you both.

Her friends in the industry aren't exactly financially savvy, so a misinterpretation isn't surprising. Just wanted to double check!

[SeattleCPA]

The one other thing about the Sec. 199A deduction is that it's not 20% of the qualified business income... it's 20% of the lesser of your QBI or your taxable income after removing capital gains.

So depending on pension deductions, standard deduction, etc. some people will get less than 20% of QBI.

BTW, sounds like your girlfriend, due to her W-2 job, won't be limited by taxable income. But some people will.

[ooeei]

The one other thing about the Sec. 199A deduction is that it's not 20% of the qualified business income... it's 20% of the lesser of your QBI or your taxable income after removing capital gains.

So depending on pension deductions, standard deduction, etc. some people will get less than 20% of QBI.

BTW, sounds like your girlfriend, due to her W-2 job, won't be limited by taxable income. But some people will.

Good call. Assuming she stays at the job all year (which she most likely will) she will get the full 20%, as the standard deduction will in effect be used against the W-2 income. If she didn't have the W-2 job it would be 20% of her QBI - standard deduction. Basically the 20% is the lowest priority deduction, and is taken after all other deductions from the sound of it.

At least I think that's right.

Doing her taxes (and her friend's) really makes me appreciate mine. W-2 and a couple small gifts. 20 minutes tops. Theirs are 2-3 hours each.

[Rocketman]

Unless she is paying estimated taxes quarterly, have her adjust her W4, so she is having extra saved for taxes. It will make the tax hit smaller next April 15th.

[ooeei]

Unless she is paying estimated taxes quarterly, have her adjust her W4, so she is having extra saved for taxes. It will make the tax hit smaller next April 15th.

She is paying quarterly. The W2 job is relatively new and is with a very small company, so we're not going to bother with doing it that way. Good idea for anyone else in a similar situation though.