IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Shahar Plinner of Formations (https://formationscorp.com/):
Self-Employed? Find Out What Expenses You Can Write Off on Your Taxes – And Some You Can’t
If tax time leaves you stressed and intimidated, wondering how to handle different circumstances as a self-employed individual, you’re not alone. You may have questions like, “Do LLCs get a 1099?” or “What expenses are deductible as a business owner?”
Fortunately, you can prepare yourself for tax season and maximize your deductions by preparing all year long with this self-employed cheat sheet. The better you track your expenses, the more confidence you’ll have when filing your taxes and the more deductions you can take advantage of.
This information is intended for self-employed individuals with an LLC or a sole proprietorship in California, but some of these deductions apply to other business entities. Consult with a tax professional if you’re unsure.
Common Business Write Offs
When you’re self-employed, you can write off a lot of expenses as part of the cost of doing business. Some of the common business write offs include:
Self-Employment Tax Deductions
Self-employment taxes include Medicare and Social Security taxes. Usually, these are split between the employer and the employee, but for self-employed individuals, they fall entirely on the taxpayer. You can deduct half of these taxes from your net income as an expense related to your business.
Home Office Deductions
The home office deductions include your workspace that you use to conduct business, whether that’s owned or rented. This is one deduction you may have to defend to the IRS, however, so be prepared.
If you pay insurance premiums for your business, such as general liability insurance, workers’ compensation insurance, auto insurance for a business vehicle, or other types of insurance, these premiums may be deductible.
If you have equipment or machinery for your business that lost its value since your initial purchase, you may get a deduction for depreciation.
Vehicle Use Deduction
Business vehicles are often tax deductible as a business expense. Prepare for this deduction with detailed information about the dates, mileage, and business purpose for your vehicle. You can calculate this deduction using standard mileage determined by the IRS.
Some business-related meals, such as meals with a customer, client, or colleague, may be deductible. You can generally deduct 50% of the meal’s cost as an expense.
Office and Supply Expenses
Office supplies are deductible if you use them for your business during the tax year, such as paper, pencils, pens, file folders, or copy paper. Some other supplies may be deductible, such as books or equipment.
Business trips may be deductible if you are traveling outside of your tax home, you’re away long enough to require rest, and the time period is longer than your normal workday. The IRS tends to scrutinize these expenses, however, so it’s important to have records of your trips and their purpose.
Professional Fees and Dues
Any professional fees you have to pay for your business, such as legal fees or accounting fees, are deductible.
If you have education costs related to your business or profession, they are deductible. This is only if you need the education for your current business, not to prepare for another career.
Taxes and Licensing
Business taxes and licensing fees are considered expenses, including federal, state, local, and foreign taxes.
If you pay commissions to agents or third-party vendors to conduct business, these are considered business expenses.
Phone and Internet Bills
Business phone lines and internet service are deductible if they are strictly used for business and not personal reasons.
Uncollected debt from client invoices or loans may be deductible.
Charitable contributions are tax deductible, but you must have records of your donations. Expenses incurred volunteering are also tax deductible.
Qualified Business income
The qualified business income deduction (QBI) is a tax deduction for businesses and self-employed individuals, allowing a deduction of up to 20% of business income.
Expenses That Aren’t Write Offs
Some business owners think that any expense for their business is deductible, but that’s not the case. Here are some expenses that aren’t usually deductible:
Unless it’s a business meal, food is considered a personal expense.
Unless you have to wear specific clothing to conduct business, clothing is generally not deductible.
Federal Income Taxes
Your federal income tax payments are not deductible.
Monetary Value of Volunteer Work
The time you spend volunteering is not considered tax deductible, though the expenses related to it may be.
Any expenses for a pet are not considered tax deductible unless the pet provides a service for your business.
How to Track Expenses
If you want to make the most of your available write offs, it’s vital that you plan for them throughout the year. Here’s some of the information you should track carefully:
- Receipts and invoices as proof of payment
- Bank statements to verify spending and earning
- Canceled checks as proof of payment
- Credit card receipts and statements as proof of payment
- Mortgage and loan documents for business-related buildings, vehicles, or other items
- Statements for interest-bearing accounts like savings accounts
Plan for Tax Time to Maximize Deductions
Tax time may be overwhelming, but it doesn’t have to be. If you plan for your deductions, track your expenses accurately, and keep yourself organized, maximizing your deductions to avoid overpaying on your taxes can be a simple and straightforward process.
If you have questions relating to the content of this article or finding ways to mitigate taxes, Shahar Plinner would welcome the opportunity to answer them. Mr. Plinner can be reached at (800) 868-1186 and firstname.lastname@example.org.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.