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What are common deductions for the self-employed?

There are a wide variety of tax deductions available to the self-employed. As a general rule, a deductible business expense is both ordinary and necessary. An ordinary expense is common and accepted in your industry. A necessary expense is helpful and appropriate for your business. Ordinary and necessary expenses vary from sector to sector. If you are a new small business, completing a Small Business Tax Worksheet can help you get organized to make it easier for you to satisfy your tax filing obligations. 

Before the end of the year, it can potentially save you money to spend money for your business. Common end of year deductible spending can include:

  • Tools and technology.
  • Office supplies.
  • Advertising.

In addition to these frequently claimed deductions, below are some of the most common deductions for self-employed individuals:

  • Business travel.
  • Meals.
  • Phone.
  • Internet.
  • Business insurance.
  • Mileage deduction.
  • Home office deduction.
  • Dues and publications.
  • Contract labor.
  • Professional fees.

For the mileage deduction, taxpayers can choose between their actual expenses or the IRS standard rate. For 2023, the standard rate is 65.5 cents per mile. Under the standard rate, you simply multiply total business miles by 65.5 cents to determine your deduction. Instead of the standard rate, you may deduct your actual car-related expenses, such as gas, licenses, tolls, insurance, depreciation, lease payments, repairs, tires, and registration fees, related to your business travel.

If you are unsure whether you should claim the actual or standard mileage, or any tax deduction you plan to claim, a tax professional can provide guidance for your specific situation.

What are some lesser-known deductions available to the self-employed?

One of the lesser-known small business deductions is the continuing education deduction. Certain work-related education may be tax-deductible if it improves or maintains skills needed for your trade or business. Depending on your situation, qualifying education expenses may include tuition, books, lab fees, transportation, and supplies. 

Another overlooked tax deduction for self-employed individuals is the credit card and loan interest deduction. When you pay interest on purchases that qualify as business expenses, you may deduct the interest that you paid. Even self-employed individuals without a business credit card may qualify for the credit card interest deduction if they use a personal credit card exclusively for business expenses. 

If you started your business in 2023, you may deduct up to $5,000 in start-up costs. Additionally, you may deduct up to $5,000 in organizational costs, which include business registration and legal fees. Start-up and organizational costs that cannot be deducted in the year of formation are typically treated as capital expenses, which are amortized over time.

Can I max out my retirement contributions?

Retirement contributions may be a good option to reduce your taxable income at the end of the tax year. As a small business owner, you may choose from several retirement plans that could fit your needs. Some familiar plans are simplified employee pensions (SEP-IRAs), solo 401(k) plans, and the Simple IRA. These accounts can be started with minimal difficulty, although it is best to work with a retirement specialist to determine which plan is best for your small business and your specific needs. 

With a SEP-IRA, an individual retirement account (IRA) is set up for each eligible employee. The employer can contribute up to 25% of an employee’s compensation. A Simple IRA is similar, however, a SEP-IRA allows both employer and employee to contribute. Not all businesses are eligible to participate in a SEP-IRA or Simple IRA.

A solo 401(k) plan, sometimes called an individual 401(k), may be a good option for self-employed individuals that want to contribute a significant amount of money to their retirement accounts. With a solo 401(k) plan, you can make a contribution of up to $22,500 as an employee during 2023. In your role as the employer, you can also contribute up to 25% of your employee compensation to the same account. Solo 401(k) plans are only available to self-employed individuals that have no employees other than themselves and a spouse. If your small business has other employees, you will need to select a different type of retirement plan. 

What are the recordkeeping requirements when claiming deductions?

Records related to your business deductions may be necessary to prove expenses to the IRS or state taxing authority if your small business tax return is audited. Your tax records may also establish that an expense is a valid business expense. Receipts or other documentation that itemize your purchases may be necessary to prove that the purchases are for your business. 

Your business records are also helpful for your accountant when they are preparing your financial statements and tax filings. Your accountant may also want to review receipts or other documents to determine if certain expenses are ordinary and necessary business expenses that can be deducted on your business tax return. 

Self employed taxpayers are often confused on how long they need to retain their business records and receipts. Some records need to be kept for longer periods of time than others and your tax professional would be in the best position to give you advice for how long to keep your records.

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This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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