Do you do contract work or own a small business? If you are among the 55 million Americans who are self-employed, tax deductions for your business can add up to substantial tax savings. And, of course, you don’t want to miss out on any deductions you can take!
Below are several tax tips that can benefit those who are self-employed, as we enter the 2017 tax season:
Deductible expenses: You’re allowed to deduct the costs of running your business as long as the expenses are “ordinary and necessary.” You cannot deduct personal, living, or family expenses. However, if you have an item that is used for both business and personal purposes, such as a vehicle, you can allocate the expense and deduct the business portion (excluding commuting miles).
Gifts for business associates: Holiday gifts for clients, customers, and other business associates qualify as deductible business expenses. However, a taxpayer can deduct only $25 annually for business gifts given directly or indirectly to any one person. Promotional items, such as calendars or pens, don’t count toward the $25 limit, if each item costs $4 or less, has the taxpayer’s name clearly and permanently imprinted on the gift, and is one of a number of identical items widely distributed.
Retirement plans: There are a variety of retirement plans available to small businesses. Contributions made by the owner for himself or herself and for employees can be deducted. In general, contributions to these retirement plans can be made up until the due date of the tax return. Consequently, the small business owner can invest money in a plan after year end and still take a deduction on the 2016 tax return. The small business owner is also allowed a tax credit equal to 50% of the first $1,000 incurred in starting up a plan.
Depreciation of property and equipment: Some self-employed people may purchase property and equipment for a business. Claims regarding property, according to the IRS, must meet the following criteria: You must own the property and it must be used or held to generate income. The property should have an estimated useful life, meaning you should be able to guess how long you can generate income with it. It may not have a useful life of one year or less, and may not be purchased and disposed of in the same year.
Repairs: Certain repairs on property used for business may also be deducted. Be sure to document the expenses and retain any receipts. Assets must be depreciated, or deducted, over the course of their useful life if it extends beyond a year. Examples include automobiles, office equipment, and machinery.
Startup expenses: The government encourages people to open a new business by allowing a $5,000 write-off for startup expenses. Startup costs include amounts paid either to create a trade or business, or to investigate the creation or acquisition of a trade or business. Examples include advertising the opening of a business, employee training, and a market survey.
Educational expenses: Any educational expense is potentially tax-deductible. If one is taking courses or buying research material to be more effective in their work, this can be deductible. Think about any books, web courses, local college courses, or other classes or materials that you have purchased to improve your job or business. It’s easy to forget a work-related webinar or business e-book that was purchased online, so remember to save e-receipts.
Business use of the home: If you use part of your home regularly and exclusively to perform administrative or managerial activities for your business, you can claim a home-office deduction for utilities, rent, mortgage interest, depreciation, and cleaning fees based on the square footage of your home used for your business. Please see our blog post http://bit.ly/2oqNriF for more details.
Health insurance premiums: You can deduct what you pay for medical insurance for yourself and your family, and it doesn’t matter if you itemize or what your adjusted gross income may be. Keep in mind, however, that you don’t qualify if you are eligible for health insurance through a spouse’s job.
Self-employment taxes: If you’re self-employed and have to pay the full 15.3 percent “self-employment tax” covering Social Security and Medicare taxes, you can write off half of what you pay. And you don’t have to itemize to qualify.
Other deductions that can be easily missed are advertising and promotional expenses, banking fees, and air, bus, or train fare. Restaurant meals and other entertainment costs may be written off as long as they are necessary business expenses. Subscriptions to trade or professional publications and donations to business organizations, both of which are frequently necessary for the continuation and growth of your business, are also tax deductible.
Regardless of which expenses you discover that you may write off, the most important thing is to keep accurate records throughout the year. Save receipts, including e-mail receipts, and file or log them so you have easy access to them at tax time. Not only does keeping receipts, mileage logs, and other expense records make filing taxes easier, but it also facilitates a system that allows you to track changes from year to year.
We hope this post helps to provide some clarification on deductions for those who are self-employed. If you need help managing any aspect of your business’s or nonprofit’s finances, we want to hear from you. Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.