Schedule C Income (tax bill question)

Assuming you have no employees: My understanding is that if your taxable income (not AGI) is under $157,500, you will be allowed a deduction equal to 20% of your qualified business income (QBI). The deduction will phaseout over a $50,000 spread. To keep it simple, QBI would be your Schedule C net after deducting business expenses. Any type of investment income is not QBI. The 20% deduction is not on Schedule C. The 20% deduction is not an adjustment to income. Therefore, your AGI will not changed by this deduction. Additionally, the deduction is not an itemized deduction, so there is no requirement to itemize. It appears, that the deduction will show up somewhere on page 2 of the 1040 and reduce your taxable income before applying your tax rates.

QBI also does not include reasonable compensation to an S-Corp owner/employee and it does not include any guaranteed payment for servicesin a partnership or LLC.

My wife and I have a sole proprietorship. About $75k income from the business. Schedule C income, we split the income, so I think two schedule C's. Does this qualify under the "deduction equal to 20% of your qualified business income" ? Mike

First off, read the following to make sure that you can treat your business entity as two sole proprietorships and not a partnership.

That said, yes your business would be eligible for the 20% deduction as I described it in my first reply to the OP.

That's interesting, I got out my tax form and it shows a Sched C under my name, with Gross receipts, cost of goods and other expenses, included under expenses is contract labor of X dollars. Then we have another Sched C under my wife's name with Line one gross receipts with the same X dollars as my contract labor number. Does that seem to be a proper way to do this? It's been like this for 10 years maybe 13 years.

And setup this way, do we still qualify for the 20% deduction?

Thanks, Mike

Your wording in your reply is somewhat ambiguous. So, maybe this will clear it up. If you are filing two Schedule Cs, it is because you apparently elected to be treated as a qualified joint venture and not a partnership. You would share the income, cost of goods and expenses on the two Schedule Cs. If a profit, there would also be two separate Schedule SEs to compute the SE tax for each of you. The only contract labor that should be on any SChedule C, is the expense that you or your spouse incurred because you both hired outside contract labor.

In lieu of electing a joint venture and still not wanting to be a partnership, one of you could have owned the business (sole proprietor) and hired the spouse as an employee or an independent contractor. In this instance the owner would have had to issue either a W-2 or a

1099-MISC if the payment was at least $600 for the year. If an employee, you would have also have had to made quarterly payroll submissions.

I am taking an educated guess, that you were not using the method in my second paragraph. I am guessing you were trying to implement the method in my first paragraph. I have no idea what the contract labor number that you were using represented nor do I know if after you completed the two Schedule Cs, you each wound up with a net profit or net loss that when added together matched the total for the jointly owned business.

Hmm, I'll try again. We have two Schedule C's. One under my name, this has all the business expenses, including the Contract Labor cost. The contract labor cost is the income on the second Schedule C, this second Schedule C is in my wife's name. There is no other contract labor, it is only what is shown on my Sched C as expense and her Sched C as income. We do split the income 50/50.

Line 12 of Form 1040 page 1 is the total of line 31 of the two Schedule C's.

Re: the issuing W-2 or 1099-Misc this was not done. Quarterly payments are made on the total income of both Sched C's, (plus personal interest and dividends.)

As far as implementing MY Method, I my be responsible, but I hired a professional to do my taxes in a proper manner. If this method is not proper, what would you do if I came you, or any other preparers knowing it has been prepared this way for at least 10 years? This is why Americans hate doing taxes, even those who are trained to know, disagree on how it should be done. ARRGH!

So, maybe this will

Now it appears clearer. "The business" has one Schedule C in your name as a sole proprietor. That Schedule C contains all the income, costs and expenses of the business. One of the expenses is for contract labor. The contract labor is for hiring your spouse as an independent contractor. This is how the business is not being treated as a partnership nor a qualified JV.

Your spouse is self-employed as an independent contractor. She reports her income for her separate business on her own Schedule C and (hopefully) is paying self-employment tax on that income. Your joint tax return reflects the sum of the net profit of your business and her business. If your business has at least $400 of net profit, then you would also have a Schedule SE for computing your self-employment tax.

The only thing missing is that you should have been issuing a 1099-MISC to her in any year in which what you call contract labor was at least $600. I do not believe that there is any exception to this for a spouse.

I will leave it to someone else to advise you how to proceed relating to the lack of 1099-MISC issuance.

Yes, both pay SS. That's our biggest tax.

We split about about $75k of income, yes, two Schedule SE forms filed. Total of the two SE forms, put on line 57 Page 2.

Hmm, falling short on the 1099-Misc. I'll ask my tax man.

Well, I'm glad to hear most of it sees to be filed correctly.

Thanks for all the info.