Becoming a parent is gratifying and challenging, while being a small business owner or self-employed can be rewarding, yet difficult. What happens when you combine the two? There are several benefits included in the Tax Cuts and Jobs Act (TCJA) and the tax code that will help bring some financial assistance and upside for parents who happen to be small business owners. Consider sharing these tips with your tax clients who fall into this category.
Qualified Business Income (QBI) owner deduction
Under the TCJA, there is now a 20 percent QBI deduction on business income for small business owners who report their operations on Form 1040, including sole proprietors who use Schedule C and/or have income from partnerships, S corporations and limited liability companies. This is a big windfall for small business owners, as $20,000 of $100,000 of business income would go untaxed! There are some calculations and limitations surrounding this deduction, including a phase-out of the deduction for high-income earners of over $160,700 for single filers, $321,400 for joint filers and $160,725 for married filing separate filers.
Home office deduction
Running a business out of a home can turn certain nondeductible housing expenses into valid business deductions. If a home office qualifies, a portion of otherwise nondeductible expenses, such as utilities, insurance, home repairs and depreciation, can become deductible business expenses. A qualified home office can also turn nondeductible commuting expenses into deductible business mileage.
To take a business deduction for a home office, a taxpayer must use part of his or her home under one of the following situations:
- An area in the home is exclusively and regularly used as the principal place of business. For example, the taxpayer meets or deals with patients, clients or customers in the normal course of a trade or business.
- Storage of inventory or product samples.
- The home is used as a day care facility.
Start-up business costs
The government encourages people to open a new business by allowing a $5,000 write-off for start-up expenses. This $5,000 deduction is reduced by the amount that your total start-up expenses exceed $50,000. Any start-up costs that are not allowed to be expensed can be amortized over a 15-year period, beginning in the month you start operations.
Start-up costs include amounts paid either to create a trade or business, or to investigate the creation or acquisition of a trade or business. Once the enterprise actually begins operations, all business expenses are deductible. Examples include advertisements for the opening of the business, and travel and other necessary costs for securing prospective distributors, suppliers or customers.
Hiring a family member
One of the benefits of operating your own business is being able to hire a family member, such as a spouse, sibling, parent or child. Payments for the services of a child under 18 who works in a parent’s business are not subject to Social Security and Medicare taxes; this applies only to sole proprietorships and partnerships. The business entity will get to deduct the wages paid to the child, and the child will escape taxes up to the income tax threshold. Remember that hiring a child in the family business still requires that they do bona fide work for the business and for a reasonable wage.
Dependent care credit
This is an individual tax credit, and the amount can be up to $1,050 for one child, or $2,100 for two or more children. Employers are allowed to provide a related benefit for their employees, too. You may be eligible for this credit if you paid someone to care for either your dependent child age 12 or younger, or your spouse or dependent over age 12 if they are physically or mentally incapable of self-care. The most common types of expenses that qualify for this credit are those paid to child care centers or for in-home care.
To qualify, the care must have been provided so you could work or look for work. One key here is that if you are married filing jointly, both you and your spouse must have earned income (including small business income). One spouse may be considered as having earned income if they were a full-time student or disabled.
It’s always a good idea to plan for retirement, especially with nice government incentives. There are a variety of retirement plans available to small businesses that allow the employer and employee a tax-favored way to save for retirement. Contributions made by the owner for himself or herself and for employees can be deducted.
The small business owner is also allowed a tax credit equal to 50 percent of the first $1,000 incurred in starting up a plan. It’s smart to consult with a financial planner before deciding on a plan that best suits the business needs.
There are lots of choices in retirement plans. IRAs, SEP IRAs and SIMPLE IRAs are retirement plans that avoid the complex rules, red tape and expensive administration costs that apply to qualified retirement plans. Note you can set up a 401(k) or SIMPLE plan if you want to cover employees.
Saving for college
The average full-time student at a four-year nonprofit private university will pay $32,410 a year in tuition and fees; add in room and board, and the price balloons to nearly $45,000. Similar to planning for retirement, saving for a college education is very expensive, but you have many years to plan for it. The smart way to go about it is to start early, save a little money each year and let the money grow. The government provides tax incentives to help with college savings, including a 529 plan, Coverdell Education Savings Accounts and IRA plans.
Tax breaks for college-bound students
The tax code provides a number of education tax credits and tax deductions that will take some of the sting out of college expenses, even before the school year starts. Parents can only claim education credits and deductions if they claim the child as a dependent. If your child files their own tax return and claims a personal exemption, they can claim the education tax credit or deduction. Tax breaks include tuition and fees deduction, the American Opportunity Credit, lifetime learning credit and student loan interest deduction.
There are many tax breaks for your clients who are small business owners and parents, all designed to reduce their tax liability and put more money in their pockets. In addition, note there are other breaks for family members, such as more preferable tax rates when married and filing a joint return, the child tax credit and the adoption credit. As a tax professional, you can provide even more value to your clients by advising them on these tax breaks.
Editor’s note: This article first appeared on the Intuit® Tax Pro Center.