Counting on the QBI Deduction
Tax break for business owners
The Tax Cuts and Jobs Act (TCJA) created a major new tax deduction for self-employed individuals and owners of pass-through entities like partnerships, S corporations and limited liability companies (LLCs). Effective for 2018 through 2025, the deduction for “qualified business income” (QBI) can be as high as 20%.
However, these deductions are reduced or eliminated for certain taxpayers, depending on the amount of QBI and the nature of the business activity and, in some cases, wages paid to employees and the value of business property. QBI is generally defined as your net income from the business less amounts in the nature of compensation.
Starting point: The TCJA divided eligible taxpayers between those that provide personal services and those that do not. The “specified service trade or business” (SSTB) group includes attorneys, physicians, consultants, athletes, financial planners, accountants, stockbrokers and others who typically offer services to the public (but engineers and architects are specifically excluded). Then the following rules are applied.
• If your income on your 2021 return is no more than $164,900 as a single filer or $329,800 as a joint filer, you are entitled to the full 20% QBI deduction—no questions asked. It does not matter if you are in the SSTB group or not.
• If your income on your 2021 return exceeds $214,900 as a single filer or $429,800 as a joint filer, you get no deduction if you are a SSTB owner. For other owners above these thresholds, your deduction is limited and possibly eliminated.
• If your income on your 2021 return falls between the thresholds stated above, your deduction may be reduced, regardless of whether you are a personal service provider or not.
Note that these thresholds are indexed for inflation. For simplicity, we have referred to the figures for 2021.
Key point: Assuming you are a personal service owner who files a joint return, the amount of your QBI is phased-out on a pro-rata basis until it disappears completely when total taxable income exceeds $429,800. For other taxpayers above the upper threshold, the deduction is limited by the greater of either (1) 50% of the wages the business pays its employees or (2) 25% of wages plus 2.5% of the basis of the qualified property owned by the business. After comparing this limited deduction to the 20% deduction of QBI, you are entitled to deduct the smaller of the two.
Suffice it to say, the calculations involving the QBI deduction for sole proprietors and owners of pass-through entities are often complex. In addition, depending on your situation, it may make sense to file separate returns if you are married, due to the way the tax brackets work. Of course, filing separately will have other repercussions and may actually increase your overall tax.
Final point: Obtain professional assistance for your situation. Remember that this deduction is scheduled to end after 2025.
How to Join in Crowdfunding
Modern method for start-ups
Do you need an influx of cash to launch a business venture devoted to your personal passion? You can do things the old-fashioned way and issue an initial public offering (IPO) for review by prospective investors. Although IPOs remain viable for some types of businesses, especially larger ones, they can cost time and money, not to mention the hassle. Alternatively, you might do things the “modern way” by raising the cash you need through crowdfunding.
Basic premise: You try to entice individuals to contribute small amounts to your cause. In other words, you solicit funds from a large crowd. Typically, the venture is initiated through one of the online portals available on the internet. Some of the most popular are GoFundMe, Kickstarter and Indiegogo, but there are dozens of others.
The contributions may be as small as $5 or $10 or as large as $100 or even more. The trick is to focus on the overall amount. For instance, if you can encourage thousands of donors to contribute, you’ll likely have a tidy sum to help get your business get up-and-running. Sometimes entrepreneurs offer perks or trinkets in return.
There are other variations on this basic theme. For instance, in some cases, loans or “royalty financing” may be arranged. The idea behind royalty financing sites is to link your business with investors who lend money for a guaranteed percentage of revenue from sales of goods or services.
For many entrepreneurs, the best-case scenario is to have investors actually acquire shares or an ownership stake in the company. In essence, this is like having a mini-IPO, but without the usual obstacles.
Note: The recently-enacted Jumpstart Our Business Startups (JOBS) Act liberalized the rules for crowdfunding, resulting in increased popularity. The Securities and Exchange Commission (SEC) oversees these types of investment activities. In 2015, the SEC released final regulations pertaining to crowdfunding.
Before you get started, consider the following suggestions to enhance a crowdfunding effort:
• Rely on friends and family members to help get the ball rolling and urge others they know to chip in.
• If you are giving out swag, try to make it something desirable to a large number of people.
• Create a business plan to show you are a serious entrepreneur.
• Use technology (e.g., a video) to make your points.
• Demonstrate that you are committed by putting up some of your own money.
• Finish your presentation with a call to action.
Tax angles: The tax rules for crowdfunding are still evolving. In a recent information letter, the IRS has said that crowdfunding revenue is generally taxable income if it is not a loan that must be repaid; a capital contribution made in exchange for an equity interest; or a gift made out of detached generosity. See your professional tax advisor for details.
The Rx for Medical Deductions
Benefits of lower tax threshold
The tax threshold for deducting medical expenses is written in stone…finally. After several years in which the medical deduction threshold jumped back and forth between 7.5% of adjusted gross income (AGI) and 10% of AGI, Congress settled the issue once and for all in the Consolidated Appropriations Act (CAA). Effective as of 2021, the CAA permanently sets the limit at 7.5% of AGI. (Of course, there are no absolute guarantees that Congress will not chip away at this tax break again in the future.)
For example, if you have an AGI of $100,000 for 2021 with $9,000 in unreimbursed medical expenses, you can deduct the excess above 7.5% of AGI, or $1,500, on your personal return. If the threshold were 10% of AGI, your deduction would have been zero. Note that the medical expense deduction is only available to itemizers.
Keeping that in mind, scour your records to find qualified medical expenses that may help you qualify for a deduction for 2021 or increase an existing deduction. Here are several examples that may be overlooked.
Transportation costs: The deductible amount is not limited to the actual cost of the physician or hospital services. You may also write off the cost of getting back and forth from the treatment (even if similar treatment is available nearby). If you travel by car, you can deduct either your actual automobile expenses or use a standard mileage rate of 16 cents per mile on your 2021 return (increasing to 18 cents per mile for 2022). While the standard mileage rate method is more convenient, you may come out ahead by keeping track of actual expenses.
Lodging costs: You can also deduct the cost of staying at a hotel or motel while you are receiving medical care away from home. However, the accommodations cannot be “lavish or extravagant.” Plus, the deductible amount for lodging is limited to $50 per day. If a companion’s presence on the trip is required, the cost of the companion’s lodging is also deductible (subject to the $50 per day limit).
Nursing care: If a family member needs nursing services in the home, the cost of such services is a deductible medical expense. The medical care does not have to be provided by a registered or trained nurse. In other words, you can pay someone else (e.g., another family member) to provide the care and deduct the expense.
Home improvements: You can deduct the cost of a home improvement if it is made for a medical reason. For instance, the cost of installing central air conditioning to alleviate a child’s asthma is deductible. The amount eligible for the deduction is the cost above the increase in value of your home. Side benefit: The cost of maintaining and operating the improvement also qualifies for the deduction.
Finally, note that you may benefit from deductible medical expenses on your state income tax return, when applicable. For instance, in New Jersey a resident may deduct the excess medical expenses above 2% of AGI. Bottom line: Review your situation with your professional tax advisor.
Compare the Risks to the Rewards
Follow sound investment strategy
It is trite but still true: Risk and reward frequently go hand-in-hand. For example, the higher the potential risk you are taking, the greater the potential reward can be, especially when it comes to investing your money. Yet the relationship between the twin concepts of risk and reward is often misunderstood by the general public.
With a better understanding of “risk versus reward,” you can tailor your investment plan to meet your personal needs and desires.
For starters, be aware that human nature can play a prominent role in the equation. As an example, you might stubbornly cling to a stock investment that continues to decline because you are unwilling to admit you have made a mistake. In the meantime, you could be missing out on a more profitable opportunity if you had invested the money elsewhere. Of course, you cannot know for certain that an alternative would provide a better return, but there is no sense in throwing good money after bad.
On the other hand, investors may be willing to take extraordinary risks for a chance at “hitting the jackpot,” even if the odds are much greater for a smaller payoff. This can be attributed to wishful thinking or inaccurate calculations— or both. Classic example: Faced with the choice between a 1% chance to win $1 million and a 5% chance to win $500,000, some people, if not most, will risk their money on the $1 million bonanza. Nevertheless, the odds for hitting the $500,000 payoff are five times as high.
As a general rule, the best investment approach is to take a long-term view that focuses on your main financial objectives. Undoubtedly, this may include some exposure to risk in the equities markets. Frequently, investors will find that having a modest amount of risk in their portfolio is an acceptable way to increase the chance of achieving their investment goals. By diversifying their portfolio through investments with different degrees of risk, they may be able to take advantage of a rising market and benefit from some protection from losses in a declining market.
Of course, there is an inherent risk in this process, nor is past performance any guarantee of future results. You should consider all the critical aspects of assembling a diversified portfolio, including your financial status, your time horizon, your health and your personal risk tolerance. And do not forget to factor in any other unusual circumstances.
There is no magic formula that applies to everyone. By developing a long-term plan for investing your money, however, you can strike a balance between risk and reward that is appropriate for your particular situation.
Fortunately, you not have to do this on your own. Rely on your professional advisors for a personal touch.
Adding up Tax Mileage for Charity
Do you travel in your vehicle on behalf of a qualified charitable organization? In lieu of keeping track of your actual expenses, you may use a standard mileage rate of 14 cents per mile, plus related tolls and parking fees, to arrive at the deduction.
Unlike the IRS-approved standard mileage rates for business reasons, job-related moving expenses (military personnel only) or medical travel, this rate is set statutorily and is not adjusted on an annual basis. And it has not changed since 1997.
Happy travels: If your charitable-related travel expenses are extensive, it may be worthwhile to record the actual expenses.
Facts and Figures
Timely points of particular interest
Child Tax Credits—The IRS recently mailed out an information letter, Letter 6419, informing taxpayers about the amount of the advance Child Tax Credit (CTC) payments they received in 2021.These amounts must be reflected on your 2021 return. If you think the amount on your letter is incorrect or if you never received a letter, the IRS encourages you to seek more information at www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.
IRS Callbacks—The average hold time when you call the IRS has increased significantly the last few years. For instance, last year it was at least 23 minutes for those who could get through and even longer during tax filing season. But a recently-signed executive order authorizes a callback option. Essentially, if a caller is placed on hold, they will be able to choose to have an IRS representative call them back. The plan is to have this feature up and running sometime in 2021.