Life as an entrepreneur is exciting. You get to control your lifestyle, your career, and your finances. When you’re raking in the money, life couldn’t get any better. However, as a taxpayer, you’ll need to remember to set aside some of your earnings for the federal government.
Paying taxes on your income is a relatively straightforward process if you work for an employer. However, it can be challenging to get your head around it if you’re a business owner or self-employed. If this is your first time filing a tax return with the IRS, then good luck. You might find that compiling your return is confusing and frustrating if you don’t know what you’re doing.
However, as a business owner or self-employed individual, you get to write off a portion of your expenses on your return. The IRS and the US government both realize the importance of stimulating small business growth in America. As part of the backbone of America’s economy, the government and tax authorities, issue tax breaks to help business owners continue to grow.
Writing off your expenses is fantastic if you own profitable businesses. You can get depreciation on the value of your vehicles and assets; you get to write off some of your home office costs, and much more.
In this brief guide, we’ll discuss which expenses you can write off on your return, and how to file your return correctly.
Tax Deductions Explained
- 1 Tax Deductions Explained
- 2 Why is Filing My Tax Return So Complicated?
- 3 Tax Deductions for Self-Employed Individuals
- 4 Your Home Office
- 5 Travel Expenses and Accommodation
- 6 Professional Courses and Development Programs
- 7 Basic Utilities
- 8 Marketing and Advertising
- 9 Computer Software
- 10 Your Website
- 11 Gas and Mileage
- 12 Health Insurance Deductions
- 13 In Closing – Filing the Paperwork
First-timers filing their taxes may be wondering what a tax deduction is, and how it benefits your finances.
The Internal Revenue Service understands that businesses have expenses and that it eats into the profitability of companies. Therefore, to stimulate the economic growth of business in America, the IRS allows you to deduct certain expenses from your annual adjusted gross income.
This benefit allows you to reduce the taxable income that you owe to the IRS, keeping more of your money in your pocket. Deductions also weight against your AGI, and enough deductions could mean that you fall into a lower tax bracket, reducing your tax obligation.
United States law offers t6ax deductions under two categories; itemized deductions and standard deductions.
The majority of taxpayers utilize the standard deduction rate when filing their tax returns. This deduction consists of a flat rate that the IRS lets you deduct from your gross income. If you stick to the standard deduction, then the IRS takes you at your word. However, if you exceed the standardized threshold for deductions, then you might have to face an audit by the IRS.
In 2019 the standard deduction increases to $12,200 for individual taxpayers and $18,350 for household heads. Surviving spouses and married couples filing together receive a standard deduction of $24,400. This deduction is already a significant rebate that nets your cashback in your bank account when filing your taxes.
However, if you’re a business owner or freelancer, then you should consider going with the itemized deduction option. Itemized deductions allow you to save even more on your tax bill. You get to claim for other expenses that would not otherwise be valid through the standardized route.
As a business owner or self-employed person, the chances are that you have a set of expenses that are part of doing business. If you can prove that these expenses are business-related, then the IRS will allow you to deduct a specific percentage of these costs from your tax return.
Why is Filing My Tax Return So Complicated?
The freedom that comes with being self-employed or owning a business is one of the best perks entrepreneurs enjoy. Unfortunately, when tax season rolls around, it presents one of the most significant financial challenges of the year.
Employees who file W-2 returns don’t have much issue, as the employer deducts the taxes from their salary. Self-employed individuals need to file quarterly, or they run the risk of incurring fees and penalties for delayed payment.
One of the biggest drawbacks of filing quarterly as a self-employed individual is that you have to cover a portion of Social Security and Medicare that would otherwise be covered by an employer. The taxes paid by self-employed individuals relating to Social Security and Medicare are “self-employment taxes.”
These taxes also create a significant burden on business owners that employ large numbers of staff. As an employer, you have the extended tax responsibility of managing your employees and ensuring that the IRS receives their cut. As a result, you’ll need to take advantage of as many tax breaks as you can to boost your bottom line.
By utilizing deductions, you get to cut back on what you owe to the IRS. By itemizing your deductions, you offset those deductions from your adjusted gross income, and you have your taxable income left over.
Making use of tax deductions depends on how you earn your income, and your true business expenses. Some people may get to deduct more expenses than others, depending on the nature of their business, and how they spend money related to operating costs.
It’s for this reason that the tax deductions for freelancers can be complicated. The chances are that you’ll struggle to identify all of the areas in which you can take a deduction. Therefore, we recommend that you work with a professional accountant when filing your tax return as a freelancer.
However, if you’re not a freelancer, then filing your return isn’t nearly as much of a hassle. As a self-employed person, you get to take advantage of writing off expenses that fall into any of the following three categories.
- Expenses relating to business operations.
- Expenses relating to the costs of doing business outside of your offices or facilities.
- Expenses relating to your business premises, otherwise unrelated to operations.
Tax Deductions for Self-Employed Individuals
Let’s unpack the expenses that the IRS allows you to deduct from your tax return as a self-employed person. This list will be relevant for anyone that’s operating as a self-employed professional. However, we still suggest that you work with an accountant when finalizing your return.
If you’re a driver for a ride-sharing company, you can claim back your mileage, and if you’re a writer, you can claim for home office expenses. These types of deductions can also apply to other industries. Professions, such as photographers, housekeepers, consultants, designers, and any other professional occupations where you work for yourself to produce income, may use deductions.
Here are the standard deductions allowed by the IRS on your tax return.
Your Home Office
As a freelancer, one of the best perks of the job is that you get to work from home. You don’t have to spend hours in traffic or money on gas. As a freelancer, you have the benefit of writing off your “home office” expenses.
So, what is a home office, and what expenses can you deduct from your taxes? The IRS sees your home as a business premise and allows you to deduct a percentage of your mortgage costs from your taxable income. The same goes for people that are paying landlords rent. You’ll also have the advantage of writing off your property taxes as well.
To qualify for a home office, you need to have a specific area of your home dedicated to an office space. You can’t use this space for any other tasks except working. Therefore, the IRS prefers if it’s an actual office and not the dining room that you’re using for working purposes.
When you claim a home office, you calculate the value of the deduction using the simplified or regular home office deduction.
Travel Expenses and Accommodation
As a self-employed person, you can deduct your travel expenses such as plane and train tickets. Deducting your mileage if you drive far is a different expense, and requires an extensive calculation.
However, any other travel and accommodation expenses you incur as a result of doing business is a valid deduction. The costs of attending trade shows are also another expense you can deduct from your tax return, along with your hotel bills.
The IRS permits a 50-percent deduction on meal expenses related to business functions. However, you can’t deduct the costs of leisure activities and sightseeing while you’re away.
Professional Courses and Development Programs
As a freelancer, you probably invest in yourself whenever you get the chance. You can write off any costs you incur for personal and career development courses. These expenses include the costs of attending seminars, as well as any purchases you make for self-development courses.
Professionals can also write off any subscription membership costs to professional organizations, as well.
If you own business premises, then you can write off 100-percent of the cost of your utilities against your taxable income. However, if you’re a freelancer working from home, then you can only deduct a certain percentage.
The percentage of home office costs written off in your return depends on the portion of your home occupied by your home office. In most cases, the IRS will permit a 20 to a 25-percent deduction.
Freelancers can also deduct the costs of air-conditioning, heating, and internet services, as well. It’s important to note that you can’t claim for utilities if you’re using the simplified deduction option.
Marketing and Advertising
It costs money to promote your business. The IRS permits you to deduct the costs of marketing and advertising your company and your products. The costs of web advertisement, Facebook ad campaigns, flyers, and business cards all count toward marketing expenses that qualify for a deduction.
As a freelancer, your computer is your source of income. The IRS allows you to deduct the costs of any software tools you use from your taxes. If your malware, editing, and grammar-checker software cost money, then you can deduct them from your tax bill.
The costs of doing business on the internet is another area where you can save on your tax return. The IRS allows you to write off development costs, hosting, domain costs, and website maintenance.
Gas and Mileage
If you drive around to meet clients or drop off sales, then you can deduct the costs of your gas and mileage from your taxes. The IRS provides two kinds of vehicle deductions on your tax return. The first option is the standard mileage. This option allows you to claim for miles driven for business purposes.
The second option is the actual mileage deduction. With this tax break, you can write off the actual fuel costs, as well as maintenance, toll fees, and other related motoring expenses, such as car washes. You’ll need to total these yourself, and it’s best if you use your accountant to help you make an accurate deduction.
Health Insurance Deductions
Self-employed persons who meet specific criteria may receive a special tax deduction permitting them to deduct 100-percent of all healthcare premiums from their gross income. These medical expenses also include the costs of vision, dental, and long or short-term care at medical facilities. The IRS also permits the deduction for the costs of medical care for your spouse and children, as well.
The IRS does not recognize this as a business deduction. Instead, it’s a special personal deduction allowed for self-employed persons. Therefore, this special deduction only applies to Federal, state, and local taxes, and not your self-employment tax.
In Closing – Filing the Paperwork
It’s best to check with an accountant for which deductions apply to your self-employment status and the nature of your business. When it’s time to file, you’ll need to list your deductions on Part II of the Schedule C, tax form 1040. Any self-employed person with less than $5,000 in deductions can use Schedule C-EZ.
The final date for returns is on April 15th, and if this date falls on a weekend, then the date shifts to the Monday or the following Monday if there’s a public holiday.
If you have any problems in handling your tax return or calculating your deduction, then speak to a qualified accountant for assistance. An accountant will identify all the areas where you can claim deductions without triggering an audit.