With
the amount of taxes the IRS already collects from taxpayers—as well as the
ever-increasing cost of living self-employed—tax payers can ill afford to
overlook claiming as many deductions as the IRS makes available. The income and
expense situation of self-employed taxpayers are widely recognized as fertile
hunting grounds for a wide variety of deductions. This article will highlight a
number of potentially significant deductions available to the self-employed taxpayer
as well as some of the most commonly over-looked deductions by the
self-employed.
Home Office Deduction, as explained by
the IRS: If you use part of your home for business, you may be able to deduct
expenses for the business use of your home. The IRS provides two methods for
calculating this deduction, the “Simplified” approach and the “Regular”
approach. The difference between the two approaches is that the Regular
approach requires the taxpayer to determine the actual home office expenses.
This approach could result in a higher deduction at the expense of more
extensive record keeping.
Regardless of the method chosen, the basic
requirements for your home to qualify as a deduction are:
- Regular and Exclusive of your home for conducting business, and
- You must show that you use your home as your principal place of business.
Investopedia recommends
these additional deductions for the self-employed:
Internet and Phone: Regardless of
whether you claim the home office deduction, you can deduct your business
phone, fax and Internet expenses. The key is to only deduct the expenses
directly related to your business.
Health Insurance
Premiums: If
you are self-employed, pay for your own health insurance premiums, and were not
eligible to participate in a plan through your spouse's employer, you can
deduct all of your health, dental and qualified long-term care insurance
premiums.
Meals: A meal is a
tax-deductible business expense when you are traveling for business or
entertaining a client. The meal cannot be lavish or extravagant under the
circumstances.
Entertainment: The IRS has
numerous restrictions on claiming the business entertainment tax deduction. For
starters, you must conduct business with the person you are entertaining
during, immediately before or immediately after the event. If your
entertainment expense meets all the tests, it’s still only 50% deductible.
And according to ZipBooks.com:
Educational expenses: If you go to
seminars, take web-based classes, pay professional dues or subscribe to
business publications, you can deduct all of those expenses.
Vehicle: If you use your
personal vehicle for business purposes, you can deduct a standard mileage
charge that is currently 54 cents per mile. Be sure to keep extremely detailed
and accurate records. If you have a vehicle that you use exclusively for
business, you can depreciate it over its useful life, which will possibly
provide a much greater deduction.
Purchase/depreciation of
computer and other office equipment: Depending on the price of the things you
purchase, you may be able to write them off completely in the year that you put
them into service with your company, or you may have to depreciate the cost
over the item's useful life.
Retirement plan(s): Even though you do
not have the opportunity to participate in an employer's 401(k) plan, there are
several ways you can set aside money tax-free for your own retirement. Every
dollar that you put into one of these plans comes off your taxable income, and
you can put a very large amount into some of these plans.
The IRS
does tend to target self-employed and small business owners at a greater rate
than ordinary job-holding individuals. This is because there is far more room
for “fudging” numbers when you are self-employed than when you receive a
paycheck. The legal advice site, Nolo.com, offers the following two rules
for the self-employed:
Claim all of your income.
Don't claim expenses for
which you didn't actually pay.
To these two rules can be added a third: Keep amazingly accurate
records. One way to do this is to use an accounting app designed for small
businesses. In addition, a smartphone-based app ensures that you always have
the ability to note and detail your expenses, no matter where you are. For more information about Accounting Services Arizona visit https://www.compasspointcpa.com.
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