Along with the freedom of being your own boss, as a self-employed person, you have several tax write off possibilities that your W-2 employed friends may not have. However, there are IRS rules and regulations that determine how much you can write off–and when you can write it off.
You can work to minimize the tax burden from your business through the business use of a vehicle, home office expenses, and health insurance. These and other common deductions for self-employed business owners can make a big difference!
Self Employed Tax Deductions You Won’t Want To Miss
Depending on the type of business you own, these tax deductions may or may not apply to you. Your Certified Public Accountant or tax expert can help you determine which of these common self-employed tax deductions can be applied to your business tax returns.
1. Business Use Of A Vehicle
If you use your business for any reason, you may be able to deduct from your bottom line for the business use of a vehicle. Many people mistakenly assume you can only include vehicle use deductions if your car is directly related to your business, such as if you are an Uber or Lyft driver.
However, you can also potentially take advantage of this deduction if you use your vehicle for other business purposes, such as:
- Meeting with clients
- Making deliveries for your business
- Meeting with vendors
- Picking up supplies
- Driving to and from business-related seminars or classes
And so forth. If the mileage is used for the benefit of your business, there’s a good chance you can make a deduction out of it.
The details: You can take a straight deduction based on the business mileage you’ve put on your car (57.5 cents per mile for 2020). Or you can deduct your actual car expenses instead, such as maintenance and repair costs, tax and registration, parking fees and so on.
If you decide to go with the mileage option, be sure to keep a mileage log for auditing purposes. Be sure to check out popular mileage apps for businesses to make tracking your mileage faster and easier.
2. Home Office Deductions Or Rent
If you rent space for your business, or if you have a home office that you use specifically for your business, you may be able to deduct some or all of those expenses on your tax returns.
The rules are a bit complicated, but they’re nothing your CPA can’t handle.
The details: If you rent space for your business, you can deduct the total amount you pay in rent provided the space is used solely for your business.
If you have a home office, there are some rules regarding deductions for office use:
- You can only deduct the percentage of your housing costs that are directly related to the percentage of home use. For instance, if your office comprises 5% of your home’s square footage, you can deduct 5% of your mortgage interest expense for your business
- You may be able to deduct home repairs that are directly related to your home office, such as replacing a window in your home office, paint for your home office, etc.
There’s also a standard deduction for home office use for business. This deduction amounts to $5 per square foot of home used for your business, up to 300 square feet. So, if your home office is 200 square feet (for instance, a 10×20 room), you can deduct $1,000 for home office use.
Here is what the IRS provides as guidance for the home office deduction. As with the other deductions here, talk with your CPA or tax expert for more details.
3. Internet And Phone Bills
Internet and phone bills are typically deductible aside and apart from your home office deduction. If you use your internet service and phone service for your business, you may be able to deduct some or all of those expenses.
The details: Remember that if you use your phone line or internet service for personal use too, you can only deduct a percentage of the monthly costs.
However, if for instance, you’ve added a second landline to your home for your business, the entire cost of that second line may be deductible.
Cell phones used for business purposes are also deductible. The percentage rule applies if you use your cell phone for personal use as well.
4. Health Insurance Premiums
Health insurance premiums you paid may be deductible in certain circumstances. If you meet those circumstances, you can also deduct premiums you paid for your spouse as well as any children age 26 or younger.
The details: You can deduct your insurance premiums If you pay your own health, dental and qualified long-term care insurance premiums, and are not eligible to participate in a health care plan through you or your spouse’s W-2 employer.
Note that this is an adjustment to income rather than an itemized deduction. This means you can take the deduction even if you’re not itemizing on your tax return.
Nolo.com does a deep dive on this subject here if you want more info.
5. Qualified Business Income Deduction
The Qualified Business Income (QBI) is a newer deduction as of 2018. If you’re self-employed and operating as a sole proprietor, you may be able to take advantage of this one.
The details: Eligible self-employed people can deduct up to 20% of their business’s qualified business income. Qualified business income by definition is the net amount of your business’s income, gain, deduction, and loss.
However, this is the short version of the definition. To find out more about the QBI deduction, see this IRS web page.
6. Your Self Employment Tax
If you’re self-employed, you have to pay the entire cost of Medicare and Social Security tax. This amounts to 15.3% of your self-employment income.
The details: If you were a W-2 employee, you’d pay 7.65% for Medicare and Social Security tax and your employer would pay 7.65%. As a self-employed person, you’re responsible for the whole 15.3%.
However, you can deduct your half of 7.65% (from your net income) because you’re a business owner.
7. Retirement IRA Or 401k Contributions
As a self-employed person, you’re eligible to open both IRA accounts and a 401k account if you meet the qualifying criteria.
The details: You can open a 401k one-participant plan if you’re a business owner with no employees. The 2020 contribution limits for such a plan are $19,500 or $26,000 if you’re over 50 years of age.
You can also deduct contributions to your SEP IRA or SIMPLE IRA up to contribution limit amounts.
8. Equipment You Purchase For Your Business
You can deduct the equipment you purchase for your business as well. However, there are a couple of ways you can do this.
The details: One way of deducting equipment you purchase for your business is to use depreciation. If you depreciate the cost of a piece of equipment, you write off a certain percentage of its cost over the life of the piece of equipment.
The second option is called “Expensing”. This option lets you write off 100% of the cost of a piece of equipment in the year that you purchased it.
Talk to your CPA or tax expert about which option is better for your business.
9. Educational Expenses
Do you take courses or classes related to your business? If so, you may be able to write off the cost of those educational expenses on your business tax returns.
The details: The course or class has to be directly related to maintaining or improving your skills for your business. For instance, if you’re an auto mechanic, you can write off any course that helps you learn more about repairing or maintaining automobiles.
10. Business Loan And Credit Card Interest
If you take out a business loan or use a credit card for business expenses, the interest you pay is usually tax-deductible.
The details: The money you borrow must be used for business expenses and not personal expenses. And keep in mind that you are only reducing your taxable income with the deduction, and not typically gaining back all that you’ve paid in interest.
For that reason, paying cash for your expenses is usually the better choice, unless you’re using a credit card that you pay in full every month.
If you entertain clients as a part of your business, or if you have to travel for business, you may be able to deduct some meal expenses.
The details: The IRS has certain rules about meal expenditures in business. First, the meals you buy cannot be lavish in nature compared to the circumstances of the meeting.
For instance, you can’t write off a $400 meal when you’re having lunch with one client or on a business trip. Second, you can only deduct a portion of the meal, depending on how you keep your records.
Also, you likely can’t deduct the entire meal, but only 50%. You can deduct 100% of the meal if the meal is for your employees, such as food at a birthday celebration or dinner as part of working late.
Quickbooks goes more in-depth on meal deductions here.
You can deduct travel for business purposes provided the travel meets certain criteria along with the fact that the travel is for actual business purposes. This means you must spend at least some of your time in training for your business and meeting with clients.
The details: Business travel is travel that takes you away from the general area of your home, lasts longer than a full business day and requires sleep or rest. You can deduct the cost of transportation to your destination, while at your destination, your lodging expenses, and your meal expenses.
13. Publications And Subscriptions
Do you purchase subscriptions and publications that are directly related to your business? If so, the cost for them could be tax-deductible.
The details: The books, publications, and subscriptions you want to write off must be directly related to your business. For instance, if you’re an Investment Advisor, you can write off books, magazines, or email subscriptions that talk about and teach on investments.
14. Business Insurance
Most businesses require some kind of insurance. If you have insurance you may be able to deduct the cost.
The details: The insurance has to be related to your business. For instance, you could deduct business liability insurance if you have a handyman business or a real estate business in which you drive clients around.
Or, you can deduct auto insurance costs for your business vehicle.
Any advertising expense that is meant to advertise your business can be tax-deductible.
The details: Whether it’s billboards, newspaper ads, TV commercials, or Facebook ads, your business advertising is probably deductible. This rule even applies to advertising costs for charitable events that your business sponsors.
16. Startup Costs
Depending on your individual situation, you may be able to deduct some or all of the startup costs for your business.
The details: If your business startup costs are $50,000 or less, you can deduct $5,000 of those costs directly off your business income. Any expenses over and above that $50,000 need to be deducted in an amortized manner over the next 15 years.
The official definition of “startup costs” by the IRS includes the costs incurred for creating an active business or trade, or investigating the creation or acquisition of a business.
There are many business deductions for the self-employed that business owners might not know about. Missing out on valuable tax deductions means reduced profit for your business. It’s important for you to educate yourself on these details so you don’t pay extra taxes!
Having your business taxes done by a professional CPA or tax accountant/advisor can be an easy way to make sure you are getting all of the deductions you’re eligible for as a small business owner.
Feel free to contact Cloud Friday today if you have any questions about how a dedicated accounting team can help you ensure you’re getting the maximum benefits regarding your business deductions.