Q: Last year I did a single consulting job for a company I used to work for (I’ve been retired five years). I received $ 3,200 and the job was completed in a week. I’m in a 22% tax bracket with retirement benefits and when I was working on my return the software asked me about the qualified business income deduction. I hadn’t heard of this deduction yet, but would be interested in deducting 20% of my consulting salary. I had planned to report the income as “other” income that is not subject to self-employment tax. It seems that by claiming the 20% deduction, I also have to show the advice as income from self-employment. Is that right? This would more than make up for the benefit of the deduction.
A: Tax on self-employment (SE) is owed on income from a trade or business that is carried out with the status of a non-employed person. The tax is 14.13% of your net business income after taking the net income calculation into account. You can deduct half of the tax paid for income tax purposes.
It is sometimes possible to successfully argue that a one-time consulting job is not subject to SE tax as it does not reach the level of a trade or company. You have a reasonable argument, provided there are no plans to continue this type of work.
The 20% “QBID” is also only available for net income from a trade or business. I don’t see how you can claim this one time activity as a company to benefit from the 20% QBID, but I’m also saying that it is not a company for SE tax.
The tax law contains several definitions of a company. I don’t think there is any difference in the definition for QBID and SE. So I think you are all in or all out on this one.
Q: I used one room in my house as an office for 11 years. I am now under contract to sell the home for a substantial gain that falls under the allowed tax exclusion of $ 500,000 for married people. However, I am assuming that I need to consider the office in this sale. The office space is 340 square feet and the house is 3,254 square feet. Do I have to pay tax on 10.45% of the profit? Will I be able to use the office for personal purposes only this year and not have any business use to resolve this issue?
A: Tax law allows a couple to exclude up to $ 500,000 in profit from the sale of a property that was owned and used as primary residence for two of the five years prior to the sale.
This provision was incorporated into the law in August 1997. The law didn’t make it clear how the exclusion would apply to situations like yours. It has been clarified that the exclusion cannot apply to that part of the profit caused by the assertion of depreciation on the property. The “flaw” only applies to depreciation claims made after May 6, 1997.
The finance department had to interpret the law by ordinance. The Treasury Department initially said that 10.45% of the profit, which corresponds to the proportion of office space, could not be excluded (in addition to the depreciation claimed).
The ordinances have a comment period so that the public, what actually means tax consultants, can weigh the proposals of the Ministry of Finance. The Ministry of Finance issues the final version of the regulations after the comment period.
Tax advisors said there was no authority to assign to business premises to calculate a taxable gain on the sale of the property. Commentators provided specific examples of previous laws to support this argument.
The Treasury eventually agreed to the taxpayers. According to the final regulations, you do not need to show the 10.45% office percentage as a profit. You must report all depreciation claimed after May 6, 1997 as profit as required by law.
There is one exception to this conclusion. If the office is a physically separate facility with its own entrance, allocation based on room usage may be required. This doesn’t seem to be your situation. So I don’t see any reason for you to worry about how the office will be used in 2021.
James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.