Owning your own business means working to help make your own dreams come true, to further your passion and ambition and create a meaningful source of income. It’s also terribly stressful sometimes and comes with a lot of risks and liabilities. Whether you’re growing your business or maintaining the revenue you already have, the costs associated with running it are often tax deductible. The phrase ‘it takes money to make money’ applies to tax deductions quite well. Here’s a rundown of the top 12 tax deductions for self-employed taxpayers. Keep your receipts!
- Self-Employment Tax
- The self-employment tax is a combined 15.3 percent on the first $132,900 of net income (plus an additional 2.9 percent on net income more than $132,900). Half of the self-employment tax – the “employer” side – can be deducted from net income.
- See our post here (from Dental CPAs) on changes to the Meals & Entertainment tax deduction. Basically, your meals as the owner are eligible for a 50 percent deduction; on-site employee meals (for a group lunch, as an example) are also 50 percent deductible, and employee events (like a holiday party) can be 100 percent deductible.
- Qualified travel expenses include travel that lasts longer than a typical workday and take place outside of your normal workplace. Airfare, taxi, other transportation costs, baggage fees, lodging, and meals are all eligible. Travel expenses are 100 percent deductible whereas meals are 50 percent deductible.
- Continuing Education
- Staying on top of industry best practices and learning new skills are paramount to the success of a business owner. The IRS will reward these efforts with education-relatex tax deductions for any training related to your job. It’s also worth noting that subscriptions and publications that specialize in your industry are also tax deductible. Daily newspapers and unrelated topics do not qualify.
- Retirement Contributions
- This is one of the bigger tax deductions for self-employed individuals. Options include a SIMPLE IRA, SEP IRA, Solo 401(k), and traditional or Roth IRA. Which one is right for you and your business depends if you have employees or family members you also want to cover, and what you want your contribution limits to be. Either way, you can deduct a portion of your contributions on your taxes.
- Where there’s liability, there’s insurance. And those costs, whether health, business, or home insurance, are deductible for the self-employed. To qualify for tax deductible health insurance premiums, you need to pay for your own insurance and you cannot be eligible to participate in a spouse’s plan. But if you qualify, you can deduct not only your premiums for health, dental, and long-term care, but those of your spouse and any dependents, too. Other insurance premiums like malpractice, casualty and loss, vehicle, fire, and so on all qualify for tax deductions.
- Home Office
- If you work from home either full- or part-time (meaning you also have a dedicated workspace outside of the home), you can deduct a portion of the home office expenses. This is a familiar tax break, but it’s undergone some changes and it can have a complicated calculation. The simple calculation is based on square footage, where the deduction is worth $5 per square foot up to 300 square feet, for a maximum deduction of $1,500. The other method requires you to calculate actual expenses like mortgage interest, real estate taxes, insurance, utilities, and others – and the percentage of time you use that space for business. Refer to Form 8829 for more information.
- Phone and Internet
- If you take the standard home office deduction, your utilities like phone and internet will already be factored into your overall tax deductions. But you don’t have to take the home office deduction to get a break on certain utility expenses. Only deduct the portion you can accurately allocate to your business, except in the case of a dedicated business phone line or internet/fax connection.
- Advertising expenses ranging from website design, email newsletters, print or online ads, direct mail campaigns, public relations, and printing business cards or brochures are all tax deductible. Advertising costs related to business start-ups are separate, and home business advertising costs don’t count.
- Vehicle Use
- Record-keeping is vital when tracking deductible expenses for vehicle use. Dates, mileage logs, and purpose of the trip are all good to keep updated. Vehicle expenses can be calculated either by the standard IRS mileage rate (currently 54.8 cents per mile) or using actual expenses. The latter requires you to consider gas, oil, registration fees, repairs, and car insurance. And you can only claim the percentage of time you used the vehicle for business.
- If your office is in a leased space, the cost of your rent is tax deductible. Other qualifying expenses include fees to cancel a business lease.
- Interest on bank loans and business credit cards are eligible for tax deductions. Don’t try to claim a personal purchase on a business credit card interest expense, though – always submit accurate, truthful reports of your expenses.
Don’t forget about other large deductions, like research and development and Section 179 and bonus depreciation. Remember that under the new tax law, fees associated with legal advice, investment advisory services, tax preparation, and transportation fringe benefits are no longer available.
For questions on tax planning for small businesses and which deductions you’re eligible to claim, contact Naden/Lean.