What are some 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, while 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 and make it easier for you to meet your tax filing obligations.
To potentially reduce your tax bill, you might benefit from increasing your business spending before year-end. Common year-end deductible spending can include:
- Equipment.
- Vehicle.
- Tools.
- Technology.
- Advertising.
In addition to these frequently claimed deductions, below are some of the most common deductions for self-employed individuals:
- Business travel.
- Office supplies.
- Meals.
- Phone.
- Internet.
- Business insurance.
- Mileage deduction.
- Home office deduction.
- Dues and subscriptions.
- Professional fees.
- Health insurance.
For the mileage deduction, taxpayers can choose between their actual expenses or the IRS standard rate. If you're 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 lesser-known deduction for small businesses 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.
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 have several retirement plans to choose from that could fit your needs. Some familiar plans are simplified employee pensions (SEP-IRAs), solo 401(k) plans, and the Simple IRA. While accounts can be started with minimal difficulty, 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 who want to contribute a significant amount of money to their retirement accounts. 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 qualifies as a valid business deduction. 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 about 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 reaching out to a Legal Pro is the best way to find out how long to keep your records and also to get tailored guidance to your questions.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
