When you first start your business you’re thinking… How am I going to make money? Who are my clients? How will I market? Will I hire? You’ve got enough questions filling your brain, you aren’t thinking about your tax moves right from the start. Lucky for you, that’s why I’m here.
Effective in 2018, the Tax Cuts and Jobs Act (TCJA), made numerous changes to self-employed tax deductions. This impacts small business owners like you. If you are self-employed, it is critical to review what you are allowed to deduct each year. Why? To ensure your business is paying the least amount of taxes as possible.
Chances are, you are already spending the money on these business needs, let’s make sure you are deducting them too. Here are 12 tax deductions and benefits for the self-employed.
- Home Office Deduction
You’ve heard me talk about this one before (since it looks like working from home isn’t going anywhere). I even wrote a blog about it! Click here to get the details on this deduction. The cost of any space that you use regularly and exclusively for business can be deducted as a home office expense. Of course, the IRS can’t see into your home as you file your taxes, but you should be prepared to defend this deduction if need be.
You can also include the business percentage of deductible mortgage interest, property taxes, home depreciation, utilities, homeowners insurance, and repairs that you pay during the year. For instance, if your home office occupies 20% of your home, then 20% of your annual electricity bill becomes deductible. And so on and so forth.
- Internet and Phone Bills
This is similar to the Home Office Deduction. But different. The key is to only deduct the expenses that are directly related to your business. Think about it like this: If you only have one phone, you can’t deduct the entire bill because you are using it for both business and personal use. Deducting direct business use of internet and phone expenses will garner a larger deduction than classifying it as a home office deduction. For example, you may use your cell phone 50% for business and 50% for personal. Therefore 50% of your phone expenses would be an deductible business expense. However, if you lumped it in as an indirect home office deduction in the example above, then you’d only be able to deduct just 20%. So be aware of the direct business use of certain mixed-use items such as cell phone and internet.
- Health Insurance Premiums
If you are self-employed, pay for your health insurance premiums, and are not eligible to be covered by a plan through your spouse, then you can deduct all of your health, dental, and qualified long-term care (LTC) insurance premiums. As long as your business is profitable, then this deduction is available to you.
Pay attention to this one, it’s unusual this year. Due to the pandemic, a temporary allowance of 100% deduction for business meals is in place through the end of 2022. To learn about what meals qualify and how you can take advantage of this read my blog about it!
To qualify as a deduction, business travel must last longer than a usual workday, require you to get sleep or rest i.e. overnight and take place away from the general area of your business. Additionally, the trip should have an explicit business purpose that is planned before you leave (and you must actually engage in that activity).
So, no… Handing out business cards by the pool on that girl’s trip to Mauii is not a business expense. But attending a business conference in Maui then enjoying after-hours with your gal pals would generate some legit business expenditures. Aloha!
- Vehicle Use
Bet you didn’t think about this one! Did you drive to the Apple store to get your computer fixed on the way to conduct business with your client? What about your 50-minute drive to a coaching conference? Those drives are deductible. Make sure to keep records of the date, mileage, and purpose for each trip.
- Publications and Subscriptions
The cost of specialized magazines, journals, and books directly related to your business is tax-deductible as supplies and materials. For example, I subscribe to multiple tax publishings to keep updated on current trends… Deductible!
This is one I’ve utilized in the past back when I was a Holistic Nutrition Coach (that’s a story for another day!)! Any education expenses that are related to maintaining or improving your skills for your business are deductible.
This is for my fellow coworking fans. If you rent out an office space, you can deduct the amount you pay for rent. You can also deduct any equipment you rent.
- Startup Costs
The IRS requires you to deduct major expenses over time as capital expenses. However, you can deduct up to $5,000 in business startup costs in the first year of actively starting your business. Startup costs include things like: market research, scoping out business locations, advertising, attorney fees, and accountant fees.
Those Facebook ads you’re running? Deductible! You can deduct any advertising you pay for. This includes online and print advertising.
- Retirement Plan Contributions
This one is worthwhile! Contributions to Simplified Employee Pension- individual retirement accounts (SEP-IRAs), Savings Incentive Match Plan for Employees (SIMPLE) IRAs, traditional IRAs, and solo 401(k)s reduce your tax bill and help you rack up tax-deferred investment gains for later. And for the 2021 tax year, it’s not too late to make a tax-deductible contribution to a traditional or SEP IRA! Unsure how to make this happen? Talk to your accountant or financial advisor.
Wooo! That was a lot, but these deductions just scratch the surface! Please note that there are more small business deductions that are more complex than this brief rundown. But now you have a good introduction to the basics. Remember, anytime you’re not totally sure whether a cost is a true business expense, ask yourself “Is this a typical and necessary expense in my field?”.
My golden rule: CONSULT WITH A PROFESSIONAL. I’ve said it before, I’ll say it again… Taxes are complicated! Even the professionals are constantly learning and updating. Get a CPA that has your business and transformation in mind. Not sure where to start?
Tell me a little about your business and we’ll get on a call to see what strategy is right for you!