02.28 2021

The Deduction for Qualified Business Income

The primary goal for the 2017 Tax Cuts and Job Act (TCJA) reform bill was to lower the Federal Income tax rate for C corporations. It reduced the corporate income tax rate to 21 percent, and Congress included a new bill called the Qualified Business Deduction (QBI) -IRC Section 199 , which applies to non-corporate taxpayers.

At the most basic level, Section 199A permits an individual to deduct 20 percent of his/her qualified business income generated through a sole proprietorship, a partnership, or S corporation. The deduction for qualified business income is the lesser of:

  1. 20 % of QBI
  2. 20 % of modified taxable income

In order to understand how to apply this deduction to your personal taxes, we have defined some important terms below.

Definition of Qualified Business Income (QBI)
QBI is defined as the ordinary income less ordinary deductions a taxpayer earns from “qualified trade or business” conducted. *Each partnership or S corporation can include the distributive share of interest held by the taxpayer.

QBI does not include some income from investment:
– Capital gains or losses
– Dividends
– Interest income
– Certain other investment items

Definition of Qualified Trade or Business (QTB)
In general, QTB includes any trade or business other than providing services as an employee. Sole proprietors, non-corporate owners of S corporations, Partnerships, and LLCs, and independent contractors are covered by this deduction.

If you’d like to learn more about this deduction, visit the IRS website: Qualified Business Income Deduction

What is the Standard Deduction vs. Itemized Deduction?

Taxpayers have two deduction options: a Standard Deduction or Itemized Deduction. They can either claim the standard deduction or itemized deduction to lower their taxable income. *Taxpayers can do both. Many them might have a question which is better to take for their tax return. Let’s start understanding the difference between Standard Deduction and Itemized Deduction. 

Standard Deduction

The standard deductions is a fixed amount that lower the income individuals taxed on. Congress sets the amount of the standard deduction each year. In 2020 standard deduction is:

FIling Status 2020 Tax Year2021 Tax Year
Single$12,400$12,550
Married, filing Separately$12,400$12,550
Married, filing jointly$24,800$24,800
Head of Household$18,650$18,800
*Standard Deduction increases if taxpayer is age 65 or older, or blind.

Claiming the standard deduction makes the taxpayer’s process much easier and quicker, which is one of reason that most taxpayers claim the standard deduction instead of itemized deduction.

Itemized Deduction

On the other hand, Itemized deductions have a list of eligible expenses and taxpayer can take for various expenses they incurred during the tax year. It sometimes exceed the standard deduction, which means that itemizing allows taxpayers to reduce their taxable income. Most common itemizing expenses:

  • Medical expenses
  • Charitable contributions
  • Mortgage interest
  • Property Taxes
  • Student loan interest
  • Child and dependent care tax credit
  • American Opportunity tax credit
  • State and local taxes
  • Gambling losses
  • IRA contributions
  • 401 (k) contribution
  • Educator expenses

And, more deductions available.

Which to take?

If your standard deduction is less than itemized deduction, you should itemized to reduce your taxable income.

More information available at IRS-Itemized Deduction and IRS-Standard Deduction

01.18 2021

Second PPP Loan

New COVID relief bill, Paycheck Protection Program passed congress on December 22. A second PPP Loan will be available. Here is a guidance you need to know.

Who is eligible for a second PPP loan?

Similar to the initial PPP loan, eligible small businesses may include:

Small businesses, Non-profit organizations, Sole proprietors, self-employed individuals or independent contractors

Addition to this, applicants must also meet the following

  • Businesses were in operation prior to February 15, 2020.
  • Businesses has a loss in revenue in 2020, which must be proved a 25 % or more reduction in gross receipts from any quarter in 2020 relative to the same quarter in 2019.
  • Businesses may not have more than 300 employees.
  • Businesses have used up or will use the full amount of their first PPP loan

SBA will provide further guidance such as application processes and required documentations. For the time being, let’s talk learn about any changes made and how those changes could affect you.

PPP Eligible expense list are added

  • Operational expenses

Payments for software, cloud computing, accounting needs and other human resources

  • Supplier costs

Expenditures any purchase order, or order for goods made prior to getting a PPP Loan essential to operate

  • Property damage costs

Property damage costs due to public disturbances that occurred during 2020, which are not covered by insurance

  • Worker protection expenses

Any personal protection equipment or property improvements and adaptive investments to help a borrower comply with COVID-19 related safety guidance during the period from March 1, 2020 onwards.

PPP expenses are tax deductible

Any expenses covered by a PPP loan can be claimed as tax deductible. The forgiven amount of PPP loans will not be included in taxable income.

12.30 2020

Standard Mileage Rates for 2021

The Internal Revenue Service (IRS) issued the standard mileage rate for 2021 to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purpose.

 

 

Standard Mileage Rates for the beginning on January 1, 2021 for the uses of car, vans, pickups or panel truck will be:

Period Business Charity Medical Moving
2021 56 14 16
2020 57.5 14 17

 

  • 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020
  • 14 cents per mile driven in service of charitable organizations, the rate is set by statute and remains unchanged from 2020
  • 16 cents per mile driven for medical or moving purposes for qualified active duty members of the Armed Forces, down 1 cent from the rate for 2020

 

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

 

 

Important Note:

  • Under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses.
  • Taxpayers also cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station. For more details see Moving Expenses for Members of the Armed Forces.