15 Tax Benefits and Deductions for Self-Employed

As a self employed individual, you spend all your time figuring out how to generate income for your business. Every year, you will have to file taxes based on your taxable income. Taxable Income is based on a simple formula.

Gross Income/ Revenues      –    Allowable Business Deductions        =              Taxable Income.

Getting as much of the allowable deductions will lower your net taxable income and as a result lower your overall tax liability. Here are some allowable business deductions that the IRS will let you deduct from your gross income/revenue before they apply the tax rate.

Self-employed business expenses

As a general rule, any time you’re not sure whether a cost is a legitimate allowable business deduction, ask yourself, “Is it an ordinary and necessary expense in my line of work?” This is the same question the IRS will ask if you are audited for these deductions. If the answer is no, don’t take the deduction. And if you’re not sure, seek professional help with your business tax return from a certified public accountant.

1. Home Office Deduction

If you run your business from your home, you can deduct a proportionate percentage of your household bills as an allowable business deduction. For instance, if you have a 1,000 sq. ft. house and you have an extra room for your business that is 100 sq. ft, then you can deduct 10% of all household bills as a business deduction. This included rent/mortgage, Electric bill, Utilities such as water, internet, and cable services.

If you have just one phone line, you shouldn’t deduct your entire monthly bill, which includes both personal and business use.  However, if you have a dedicated business phone line, you can deduct 100% of the cost associated with the second phone.

2. Meals Deduction

You can deduct 50% of meals purchased when you are traveling for business, at a business conference, or entertaining a client. The only condition is that they cannot be lavish or extravagant. You will need to keep your receipts indicating the time, place, and business purpose of your travel. If you do not have the receipts, you can still deduct 50% of the allowable per diem allowance published annually on the U.S. General Services Administration (GSA) website (https://www.gsa.gov/travel/plan-book/per-diem-rates). Note: Unless you are traveling, meals you eat by yourself at your office are not allowable.

3. Travel Deduction

The cost of transportation to and from your destination like bus tickets, plane tickets, car rental, Uber, hotels. Keep them reasonable. Travel expenses for business are 100% deductible. If your trip combines business with pleasure, you can only deduct the expenses related to the business portion of your trip.

4. Vehicle Use Deduction

When you use your car for business, you can deduct up to 57.5 cents for every mile you drive for business as a business expense. keep excellent records of the date, mileage, and purpose for each trip, and don’t try to claim personal car trips as business car trips. If you want to use the standard mileage rate on a car you own, you need to use that method in the first year the car is available for use in your business. In later years, you can choose to use either the standard mileage rate or switch to actual expenses

5. Publications and Subscriptions Deduction

The cost of specialized magazines, journals, and books directly related to your business is tax-deductible.

6. Continuing Education Deduction

Any continuing education expenses related to maintaining or improving your skills for your existing business are deductible. However, the cost of classes to prepare for a new line of work isn’t deductible because it has nothing to do with your business.

7. Business Insurance Deduction

Any insurance acquired to protect your business, such as fire insurance, credit insurance, car insurance on a business vehicle, or business liability insurance is deductible.

8. Rent Deduction

You can deduct the amount you pay for rent as well as for the equipment you rent. If you have to pay a fee to cancel a business lease, that expense is deductible, too. You cannot deduct rent expenses on any property that you own, even partially.

9. Self Employment Tax Deduction

Self Employment Tax is 15.3% on the net income from self employment. Half of that (7.65%) is your responsibility and the other half is the employer’s responsibility. The employer’s portion is a business expense and therefore can be claimed as a deduction on your tax return.

10. Health Insurance Premiums Deduction

If you pay for your own health insurance premiums, and are 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 for your spouse, your dependents, and your children who were younger than 27 at year-end, even if they aren’t dependents on your taxes.

11. Interest Deduction

Interest on a business loan from a bank is a tax-deductible business expense. If a loan is used for both business and personal purposes, the business portion of the loan’s interest expense is allocated based on the allocation of the loan’s proceeds.

12. Advertising Deduction

You can deduct the cost of advertising that encourages people to engage your business. You can even donate to charity while also putting your business name before the public in the hope of gaining customers.

13. Retirement Plan Contributions Deduction

One deduction you can take going into business for yourself that is especially worthwhile is the deduction for self-employed retirement plan contributions. Contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s reduce your tax bill now and help you rack up tax-deferred investment gains for later.

14. Startup Costs Deduction

The IRS usually requires you to deduct major expenses over time as capital expenses rather than all at once. However, you can deduct up to $5,000 in business startup costs in the first year of active trade or business.

15. Office Expenses Deduction

Office supplies such as paper and ink, credit card processing fees, tax preparation fees, and repairs and maintenance for business property and equipment are also deductible.

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  1. Thank you for this article. It is very broad and covers most of the small business deductions. It is a must read for anyone wanting to understand the american tax system.

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