One of advantages about being self-employed is that a lot of things that were not deductible as an employee suddenly become so once you start working for yourself. The tax code is chock-full of potential tax deductions for the self-employed. However, many of them can be easy to overlook or miss.
Here are the top 10 overlooked tax breaks for the solopreneur. Doing your taxes may never be fun, but at least this way you can hold onto a little more of your hard-earned money:
1. Startup Costs: In your first year of business, all expenses you incur before beginning operations can be deductible – as much as $5,000. The costs can be amortized over time if you spend more than $5,000.
2. Health Insurance Premiums: Because so many self-employed folks pay for their own health insurance, this deduction is definitely one of the big ones. If you are self-employed and buy your own medical insurance on the open market, you can deduct 100 percent of what it costs to cover you and your family.
3. Medicare Premiums: Similarly, for the older freelancer, Medicare premiums – as well as supplemental Medicare policies – can be tax deductible.
4. Education and Training: The cost of taking training classes, buying books, putting on or taking webinars, subscribing to magazines or newspapers or websites, traveling to trainings, etc. can all be fully deductible. As long as the expense is related to business education or training, then this is a legitimate deduction.
5. Retirement Plans: Your contributions to IRAs and 401k plans typically make for the most profitable tax deductions. Here’s why: As of 2016, 401(k) contributions up to $18,000 and 25 percent of net income are deductible. As much as $53,000 can be deducted into a SEP IRA.
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In essence, the government is trying to prompt and reward you for taking steps to plan for your retirement by not taxing you on it (that is, until you eventually withdraw it).
6. Interest Payments: Interest paid for business expenses (credit cards, loans) can be a great yet often overlooked tax deduction. Make sure to keep track of these things.
7. Big Purchases: Large items that you purchase for your business (for example, cars or computers) can be tax deductible – up to $250,000. As long as these purchases take place within a single fiscal year, then there is no value depreciation involved.
(However, keep in mind that for an auto, if you do happen to claim any depreciation in any given tax year, you will not be able to switch back to claiming the standard mileage rate for the next tax year.)
8. Vehicle Costs: Keep track of all the driving you do for business – these miles can go toward your business auto expense deduction. A lot of self-employed people don’t know about this one, despite how often people drive for work. The miles driven not for personal use count as business expenses.
Keep a log, and at the end of your business miles log for the year, multiply that number by the standard mileage rate – $0.575/mile. If you’d like, you can instead save receipts for things like auto repairs and gas, but if you just stick to the standard mileage rate, your deduction will probably be bigger.
9. Self-Employment Taxes: Because being self-employed means you are both employer and employee, you can deduct 50 percent of Social Security and Medicare taxes on your personal IRS Form 1040.
10. Home Office Deduction: There are a lot of tricky catches to this deduction, which is probably why only about one-third of all self-employed individuals claim it. There are two main criteria that the IRS looks for:
A dedicated space in your home used as your primary place of business, AND
This space must be used regularly and exclusively for the business.
If these two criteria are met, then things like homeowner’s insurance and utility fees related to the space can be deducted. If you are able to, this deduction is well worth claiming.
Given all of the above, for the self-employed, keeping records, receipts, and logs is one of the most important tax habits one can adopt. As long as you are mindful of the deductions available to you and have the paper trail to prove it, you are good to go.
Doing your taxes may never be fun, but at least there are tricks to make it a little more rewarding.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business Success.© Steven D. Strauss.
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