One-off consulting gig may not be a business - Albuquerque Journal

One-off consulting gig may not be a business

Q: Last year I did a single consulting job for a company that I used to work for (I have been retired for five years). I received $3,200 and the work was completed within a week. With retirement pay I am in a 22% tax bracket and as I was working on my return the software asked me about the qualified business income deduction. I had not heard about this deduction but I would be interested in deducting 20% of my consulting pay. I had planned to report the income as “other” income not subject to self-employment tax. It seems that by claiming the 20% deduction I also have to report the consulting as self-employment income. Is that right? It would more than offset the benefit of the deduction.

A: Self-employment (SE) tax is owed on income from a trade or business carried out in a non-employee status. The tax is 14.13% of your net business income after allowing for the way “net” earnings are computed. You can deduct one-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 because it does not rise to the level of a trade or business. You have a reasonable argument provided there are no plans to continue this type of work.

The 20% “QBID” is also available only for net income from a trade or business. I do not see how you can claim this one-time activity as a business to benefit from the 20% QBID but also say it is not a business for the SE tax.

The tax law does have several definitions of a business. I do not think there is any distinction in definition for QBID and SE. Therefore, I think you are all-in or all-out on this one.

Q: I have used one room of my house for an office for 11 years. I am now under contract to sell the house for a substantial gain that will fall within the allowed $500,000 tax exclusion for married people. However, I assume that I will have to account for the office in this sale. The office space is 340 square feet and the house is 3,254 square feet. Would I have to pay tax on 10.45% of the gain? Can I just use the office for personal purposes this year and not claim business use to solve this problem?

A: The tax law does allow a married couple to exclude as much as $500,000 of gain from the sale of a property owned and used as a principal residence for two of the five years before sale.

This provision was added to the law in August 1997. The law did not make clear how the exclusion would apply to situations like yours. It did make clear that the exclusion could not apply to the portion of the gain caused by claiming depreciation on the property. The “taint” applies only for depreciation claimed after May 6, 1997.

The Treasury Department had to interpret the law by regulation. Treasury first said that 10.45% of the gain, which is the share allocated to the office space, could not be excluded (in addition to any depreciation claimed).

Regulations have a comment period to allow the public, which really means tax practitioners, to weigh in on the Treasury proposals. Treasury issues the regulations in final form after the comment period.

Tax practitioners said there was no authority for an allocation to business space to compute a taxable gain from sale of the property. Commentators provided specific examples to prior law to support this argument.

Treasury finally agreed with the tax people. The final regulations do not require you to report the 10.45% office percentage as gain. You must report all depreciation claimed after May 6, 1997, as gain since that is in the statute.

There is one exception to this conclusion. If the office is a physically separate facility with its own entrance then an allocation by space usage may be required. This does not appear to be your situation. Therefore, I see no reason for you to worry about how the office is used in 2021.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at


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