What is the Qualified Business Income Deduction?
Family child care providers who showed a profit for their business in 2018 are entitled to a new tax deduction called the Qualified Business Income Deduction (QBI).
This tax deduction can be significant and appears on IRS Form 1040 U.S. Individual Income Tax Return, line 9.
The Qualified Business Income Deduction allows providers to reduce their federal taxable income by 20% of the lower of their business profit or their family taxable income. The only providers who can't take advantage of this new deduction are those that show a business loss (Schedule C, line 31).
Note: Taking the QBI will not reduce your Social Security/Medicare taxes nor your state income taxes.
How to calculate your Qualified Business Income Deduction
You must first determine your business profit and then determine your family taxable income. Your business profit is your business income minus your business expenses. This appears on IRS Schedule C Profit or Loss From Business, line 31.
Calculating your family taxable income requires you to fill out a "Simplified Worksheet" on page 37 of the instructions to Form 1040. It's a 17-line worksheet that is anything but simple!
Here's how to determine your Qualified Business Income Deduction if you are single
Subtract from your business profit: one half of your Social Security/Medicare tax, any qualified health insurance deduction, any qualified retirement contributions (not including contributions to a Roth IRA) and any child and dependent care credit*. This amount will appear on the new IRS Schedule 1, line 36 as well on Form 1040, line 7. This is the amount we will compare to your family taxable income.
To determine your family taxable income we must fill out the "Simplified Worksheet" found on page 37 of the instructions to Form 1040. The amount you put on line 11 of this worksheet is the amount from Form 1040, line 7 minus your standard deduction of $12,000 (or your itemized deductions if they are higher).
The Worksheet will compare your family taxable income with your business profit. It will multiply the lower of these two numbers by 20% and put the result on Form 1040, line 9. This is your Qualified Business Income Deduction (finally!).
For example: $40,000 business profit - $2,826 (one half of Social Security/Medicare tax) = $37,174. This appears on Form 1040, line 7. The "Simplified Worksheet" will subtract from this the standard deduction of $12,000 to get $25,174. Since this is less than $40,000, the Worksheet will multiply $25,174 by 20% to get $5,035. Federal taxable income is now reduced by $5,035. In this example the provider doesn't have any qualified health insurance deductions or retirement contributions or child and dependent care credit
Here's how to determine your Qualified Business Income Deduction if you are married
Add your spouse's income to your business profit to arrive at your adjusted gross income on Form 1040, line 7.
For example: $30,000 business profit - $2,119 (one half of Social Security/Medicare tax) - $3,000 regular IRA contribution+ $50,000 spouse gross income = $74,881 adjusted gross income. Fill out the "Simplified Worksheet" and subtract from this the $24,000 standard deduction (or your itemized deductions if they are higher) = 60,881 family taxable income. This amount goes on line 11 of the worksheet. Since $30,000 is less than $60,881 we multiply $30,000 by 20% to get $6,000. Federal taxable income is now reduced by $6,000.
Note: If your spouse is also self employed, add together the profit from both businesses in the calculation of your family taxable income.
This is a terrific tax benefit! It is a result of the December 2017 federal tax bill that made a number of significant changes in the tax laws.
All family child care providers are eligible to take advantage of this deduction unless they are incorporated as a C Corporation.
The above examples are relatively uncomplicated. It gets more complicated if you have net capital gains, REIT dividends or public traded partnership income. If you are single and have a profit of more than $157,500 or married and have a combined income of more than $315,000, you do not fill out the Simplified Worksheet and the calculation for this deduction is even more complicated. See the instructions to Form 1040 for details.
Summary
As long as you have a profit in your business you want to take advantage of this new tax deduction. Look for it on line 9 of Form 1040!
Because of this tax deduction involves filling out a new Schedule 1 and the complicated "Simplified Worksheet" I am concerned that this is an area ripe for mistakes to be made by providers as well as some tax preparers.
The qualified health insurance deduction allows you to deduct 100% of your health insurance premiums if you are not eligible to be covered by health insurance through an employer. You are eligible for the child and dependent care credit if you pay someone (other than a family member) to care for your child while you are working. This can include paying a babysitter while attending training or sending your child to a preschool program during your work week.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.shutterstock.com/search/1040+tax+form
For details on how to fill out Form 1040, see my Family Child Care Tax Workbook and Organizer.
