Will the tax plan save me money?

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Q. I’m a contract worker with an LLC. I work as an artist, designing flyers, posters, websites, logos – whatever work I can get. How does the tax plan treat me and my business income? Do I qualify for the lower rate?
— Still working

A. The Tax Cuts and Job Act has benefits for certain businesses.

If you are the owner of a single member Limited Liability Company, this means that the net income that you generate from your design activities is reported on your Form 1040 on Schedule C.

“Your net income may qualify for the new Qualified Business Income (QBI) deduction enacted as part of The Tax Cuts and Jobs Act, effective for 2018,” said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

He said the QBI deduction is 20 percent of your net profit if your overall taxable income does not exceed $315,000 if a joint filer, or $157,500 if any other filing status (single, head of household or married separate).

If your taxable income exceeds $415,000 ($207,500 if a different filing status), then this deduction is limited to the greater of 50 percent of wages paid to employees or the sum of 25 percent of wages paid to employees plus 2.5 percent of the cost of qualifying depreciable fixed assets, he said.

“It is not a reduced tax rate; rather, it is an additional deduction that you would claim,” he said. “If for argument’s sake you were subject to a marginal Federal tax rate of 24 percent, the QBI deduction would lower your effective tax rate to 19.2 percent on that income.”

Becourtney said because you label yourself as a contract worker, you are likely a one-person operation without any employees. So, if your taxable income exceeds $415,000/$207,500, then you would likely end up with only a minimal deduction equal to 2.5 percent of any computer or other equipment used in your business.

If your income falls in the $315,000-$415,000 range if filing jointly or within the $157,500-$207,500 range if a different filing status, Becourtney said, your available QBI deduction would be phased out based on how far into the income range your taxable income would amount to.

“If you are entitled to claim a QBI deduction for federal tax purposes, you will not obtain any comparable tax benefit for New Jersey gross income tax purposes as the New Jersey Division of Taxation has expressly announced that it will not honor this deduction for state tax purposes,” Becourtney said.

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