Many of our clients are truly savvy individuals who have a firm grasp on not only the tax tips that follow, but on even more complex tax strategies that are often advantageous for larger businesses with millions in sales and dozens or even hundreds of employees.
However, such a successful business owner may have a child, a nephew or niece, or a young person that they have mentored who is launching a business as a solo entrepreneur. You may possibly know someone who, after years of working for someone else, has decided to strike out on her own. These simple tax-savings ideas, while probably “old hat” to some, may be eye-opening for others who are less experienced. And besides, a little review of fundamentals never hurt anybody! In that spirit, then, consider these basic tax tips for self-employed individuals.
Self-Employment Tax Deduction: While it’s certainly not enjoyable to pay extra taxes for the privilege of being your own boss, the tax code does allow you to deduct half of the employer portion of your self-employment tax as a business expense, thus reducing the amount of business income subject to ordinary income tax.
Home Office Deduction: Many small business owners do at least some of their business-related work at home, and if they do this in a space specifically set aside for the purpose, they may qualify to deduct certain costs as a business expense. The space must be a dedicated, enclosed space—in other words, a table in the corner of the dining room or bedroom usually won’t qualify—and it must be used regularly for the conduct of the business. If you qualify, you can deduct a portion of your utilities, and, depending on whether you own or rent, a percentage of home mortgage interest, depreciation, homeowner’s insurance, property taxes, maintenance costs, and rent, based on the square footage of the space as a percentage of the total square footage of your home. You will need to keep careful records, usually including a diagram of the space, with measurements.
Business Meals: If you are traveling for business or entertaining a client or prospective client, you may deduct half of the actual cost of the meal. It cannot be lavish, and the purpose of the meal and any guests must be clearly documented.
Business Travel: In order to be deductible, business travel must last longer than a typical workday, must involve the need for sleep or rest (overnight stay), and must take place outside the “home area” of the business (you probably shouldn’t try to deduct the cost of an in-town “retreat” as a business travel expense). The purpose for the travel must be established ahead of time. Documented lodging and meal expenses may also be included.
Personal Car Mileage: If you use a personal vehicle for business-related purposes, the mileage is deductible at the standard rate established each year by the IRS. Keep daily records of miles traveled and the related business purpose. Note that your commute to and from the office would not usually be allowed as business mileage.
And whether you are just starting your business or are a veteran business owner, be sure to consult your CPA to discuss tax strategies that are appropriate for you.