Ever since the changes in tax law hit the news last December, U.S. residents have been trying to get as much information as possible. If you’re currently a freelancer or a small business owner, you should actually be twice as interested in knowing what to do next.
Sadly, there are many things we still can’t figure out about the biggest tax modifications in 30 years. However, we’re here to tell you everything we do know for sure. Here are the most important aspects you should be aware of as a business owner/freelancer about the upcoming tax season.
There Is a 20% Deduction for Pass-Through Income
Pass-through income was previously taxed as ordinary income – but that’s about to change. In other words, the law implied that both wages and pass-through income were taxed the exact same way.
Ever since the new tax law was approved, there is a 20% deduction for pass-through dollars, which is pretty good news for freelancers and business owners.
You Can Write Off the Entire Cost of Business Equipment
Up until 2018, business equipment could’ve been depreciated over a couple of years on your tax return. This means that you can’t write off all the amount you paid for those products and may only spread the deduction over many years. Gladly, now you can deduct the entire cost of ‘pretty much any capital asset’ the first year you buy it.
According to Ed Slott, CPA, ‘If you’re already going to buy it, you can get a big bang out of it.’
Some Employees Can’t Deduct Out-of-Pocket Expenses
This rule applies to anyone that receives a W-2 tax form. Let’s say you are an independent worker, a freelancer: are you a freelancer in the colloquial sense, or for the IRS, or both?
Before the new tax law, people who got paid as employees could deduct out-of-pocket professional expenses on their tax return. As NY enrolled agent Phyllis Jo Kubey explains, ‘that has been completely eliminated with the new tax law.’
However, if you’re used to keeping track of your business expenses, continue to do it! There might be a slight chance that some states could allow employees to deduct at least part of the expenses. You can also try to negotiate the terms of reimbursement for business expenses with your current employer(s).