I slacked off a bit in this series this year, but this tax change is too important and too easy to miss for me not to give a brief post about it.
As part of the tax changes in 2018, there is a what’s called the Qualified Business Income Deduction. This isn’t on the Schedule C and it’s a single line on the 1040, so it’s going to be easy to overlook (and expensive if you do).
In the draft 1040, it’s line #9 there, right under the Standard or Itemized Deduction line. Still in draft form as of this writing, the 1040 instructions are here: https://www.irs.gov/pub/irs-dft/i1040gi–dft.pdf
This deduction is explained on page 34 of the instructions (don’t get me started on 119 pages of instructions for this stupid … never mind. Tax protest is for another post).
For most authors, this is going to be a deduction of 20% of your net business income from Schedule C after expenses.
If you incorporated as a C-corp (unlikely) you’re out of luck, but for sole proprietors, LLCs, and S-corps, this applies, though there are some kinks around S-corps that you’ll want to talk to your tax professional about.
There are also some income limits. $157,500 if single or $315,000 if married. If your income is below those thresholds, then you’re good — if above that (congratulations!) there are some additional calculations to do and the deduction starts to phase out (boo!).
So, familiarize yourself with this deduction and make sure your tax professional (if you use one) is familiar as well. This is new, so a lot of them might not think of it.
“But wait!” you or your tax professional say. “Certain trades or business are not eligible for this deduction, based on whether the business relies on the personal services yadda-yadda-yadda. And I’m a writer, so it’s my personal yadda-yadda that yadda-yaddas.”
Your business is publishing and selling books. That’s where your money comes from. That you wrote the books isn’t really relevant, because you receive no money for the writing, only for the selling. Your business is publishing — if you died tomorrow, the business could go on publishing, selling, and making money without your personal writing talents. The business could publish someone else’s writing just as easily.
If you get a significant amount for personal appearances, teaching classes, etc. then you might fall into this category, but the typical author won’t bet here.
Even if you are in that small group, the business is qualified if income is below the $157k/$315k threshold.
So enjoy this extra 20% deduction while it lasts, since you never know when some bloody bastard’s going to come along and remove it.
Thank you, sir. A good reminder. As S-corp authors, I guess the wife and I have some additional homework to do…
There’s a calculator out there somewhere to determine the optimal S-corp W2 wages to pay yourself to optimize this at several levels. I can’t find the link, though. 🙁
Wages? You mean, like income? We’re supposed to be making money at this? 🤣