If you're filing your taxes in 2019, you're going to be stoked.
A new tax bill, the 2017 Tax Cuts and Jobs Act, was passed in December of 2017, and a lot of it came into effect in 2018 for the first time.
One part of this bill was that the corporate income tax rate went from a maximum of 35% down to 21%. That is a massive help for the big publicly traded companies, but what about the smaller guys?
Great news – QBID is a new deduction in connection with this bill. And it's saving independent insurance agents thousands of dollars on their taxes.
What is QBID?
Qualified Business Income Deduction, or QBID for short, is a 20% deduction for pass-through businesses. This deduction was created by the 2017 Tax Cuts and Jobs Act.
If you report your income as a sole proprietorship (which most independents agents do), you might be entitled to a deduction of up to 20% of qualified business income.
A couple exceptions and limitations include:
- Income exceeding $315,000 for a married couple filing jointly
- Income exceeding $157,000 for everyone else
- C corporations
Here's how it works: you can now deduct 20% of your net income from a trade or business.
In the insurance world, when you work on commission, you report your income as a sole proprietor (a lot of agents do, anyway).
Your net income from your business – sales minus expenses – can be deducted by 20%. Don't forget that there are a ton of eligible expenses that you can deduct, such as travel costs, your cell phone, your home office, continuing education, and more.
Ultimately, you're going to pay less income tax because of this deduction.
How Much Money Could I Save from QBID?
Sure, a 20% deduction to your net income sounds pretty good, but how much money will that actually put back in your pocket at tax time?
Andy Thomas, Partner at the CPA firm May, Cocagne, & King, has provided us with an example.
Let's say your total insurance commission income for 2018 was $125,000. Let's compare the tax scenario for this year versus what it would have been last year.
|Insurance commission income||$125,000||$125,000|
|Expenses (Travel, phone, etc.)||($25,000)||($25,000)|
|Net income reported on Schedule C||$100,000||$100,000|
|1/2 Self-Employment Tax||($7,000)||($7,000)|
|Net income from business||$93,000||$93,000|
In this example, the 2018 business income is $18,600 less than it was in 2017.
If you're in the 22% tax bracket, your tax savings will be $4,092.
Use a CPA at Tax Time
Like we mentioned before, there are some limitations, such as how much money you made. Additionally, you should know that QBID does not reduce your self-employment taxes nor is it deductible for state income taxes.
If you're self-employed – that includes insurance professionals compensated by commission income (rather than W-2 income) – you'll find that these new tax laws can provide valuable savings. However, the rules related to QBID can be quite complicated.
We recommend consulting with a CPA to not only protect yourself from errors, but to save the most money in the long run.
You are welcome to use Andy Thomas from May, Cocagne, & King if you are looking for a CPA that is experienced in helping independent agents. This firm has 3 offices in central Illinois (Decatur, Monticello, and Bloomington), but they do help many clients remotely. If you need assistance, you can email Andy directly or call him at 217-875-2655.