Tax Deductions for the Self Employed
It’s important to make sure that you don’t miss any tax deductions that are available for the self-employed. Make sure you review these key tax breaks.
Do you have a home office?
If so, you may able to claim the home office deduction. You must meet certain requirements though. Specifically, the office must be allocated to the portion of the home that you regularly and exclusively use for your business (reference: IRS Publication 587). Generally, you can deduct the business portion of these expenses: real-estate taxes, qualified mortgage-insurance premiums, deductible mortgage interest, rent, casualty loss, utilities, insurance, depreciation, security systems, and repairs. You can also deduct expenses associated with a separate free-standing structure that you use exclusively and regularly for business (IRC Section 208A(c)(1) & IRS Publication 587).
It’s important to note that there is also a new method for the home office deduction. It is important to note though that businesses will only be able to use this option if their home office expenses does not exceed $1,500 or 300 square feet. In addition, small businesses that opt to use this method won’t be able to claim any depreciation expense as an itemized deduction, which is allowed under the regular method.
Do you have business travel expenses during the year?
If so, your business travel expenses for plane/train tickets, cabs and rental cars as well as hotel costs are deductible. If you traveled by car, you may be able to claim the standard mileage deduction of .565 per mile. In order to claim the standard mileage deduction, it’s best to have a daily log detailing your business travel with pertinent information related to the client site, miles traveled, date/time etc. However, if you haven’t been very diligent, you can still go back and estimate your mileage according to your daily route. For instance, when traveling from your home office to other temporary business locations or client sites, you can deduct the actual travel expenses or claim the standard mileage rate (.565 per mile). If you traveled a total of 10,000 miles to various business locations, you could deduct $5,650 (10,000 * .565). The total tax deduction would result in a $1,977 reduction to your overall tax liability, which assumes a 35% tax rate.
Are you deducting your cell phone bill?
IRS and tax court rulings support deducting 100% of cell phone expenses as long as you have at least one home phone dedicated to personal calls. This can easily add up to over $1,000 in tax deductions as monthly fees for many smartphone users are at or near $100 a month.
Did you have self-employed health insurance costs?
You can deduct health insurance costs for yourself and your family when calculating self-employment taxes. The catch is that the benefit doesn’t apply to those with a secondary business and a full-time job in which their employer provides for a subsidized health plan. Those with spouses that have an employer subsidized health plan are also disqualified from the deduction.
Did you make retirement plan contributions?
You can personally contribute up to the lesser of $17,500 or your earnings plus 20% of your net self-employment income for a total of $51,000 and if you’re 50 or older, your limit is raised by $5,500 to $56,500. One of the best features of this plan is that the cost to setup is minimal at to $100 or so and the annual fee is only $10 to $250 depending on the provider. The limits are similar for SEP-IRA contributions, however, there is no catch-up provision for those 50 or older.
Don’t be afraid to deduct business dinners
You can deduct 50% of meal and entertainment related expenses that serve a business purpose as referenced in Section 274 of the Internal Revenue Code. Please note though that there are two types of entertainment expenses as defined by the IRS: those that are 1) directly and 2) indirectly related to the business. Directly related means that the sole purpose of the entertainment was for business and the expectation was for money to be generated during the meeting. Indirectly means that there was entertainment associated with business such as attending a sports contest or a theatrical performance. In this instance, generally you can only deduct the expense if there was a significant business discussion that occurred during the entertainment event. Of course, you will need to document what was discussed and how it relates to the business.
Are you claiming your technology tools?
We live in a business world that relies heavily on technology. If you use a computer, tablet (iPad), or other technology device to further your business productivity that is ordinary and necessary in your industry, then it’s likely a deductible expense. These items are fully deductible expenses as long as you can find a business purpose for it.
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