Self-Employed Business Tax Deductions
Self-employed individuals likely work long, difficult hours, spend their own resources and put their own neck on the line to sink or swim in the economy to provide for themselves and family. For this, the government helps by offering tax breaks that aren't offered to people hired by a company, punch a clock and paid a wage, known to the Internal Revenue Services as W-2 workers, who are issued W-2s by their employers at the end of the year.
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Home Office
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The IRS permits you to claim a deduction for conducting your business out of your home. While some write this deduction off as a rental expense—that is, charging themselves rent for the office space—professional tax experts advise against deducting home office expenses in this way because it raises a red flag for an IRS audit. The best way, according to professionals, is to measure the space used exclusively for a home office and deduct it in that same percentage of the mortgage or rent paid for the property. In other words, if the home office is 10 percent of your home space, you can deduct 10 percent of the mortgage or rent paid for the property.
Office Supplies and Equipment
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Everything from paper tacks to computers to software is deductible if it is used exclusively for the self-employed job. Even if you are a landscaper, the IRS recognizes the need for an office to prepare bills, a printer to print the bills, mailing costs to send the bills to customers, computers to generate the bills or prepare estimates, and office furniture like desks and chairs to effectively run your business. If you have a phone line dedicated exclusively to business, that is deductible, as well. Keep in mind that software becomes outdated quickly (as do computers themselves) so replacement software and computers may be deducted as appropriate. The IRS now allows the deduction in the same year the purchase is made. Previously, equipment had to be amortized over three years.
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Mileage
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Mileage is an often over-looked deduction. The deductible rate changes almost yearly. For 2010, for example, you can deduct 50 cents per mile—a reduction of 5 cents per mile over the year before. Until 2010 the typical deductible mileage rate usually increased. (It was 55 cents the year before.) So make certain you check with the IRS deductions manual of the applicable year to make sure you are deducting the proper amount.
Health Insurance
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This is probably the most overlooked deduction. The good news is that the health insurance premiums are 100 percent deductible. There are limitations, of course. The deduction can't be more than the net profit shown by the business. It's also not allowed if you are eligible for other health coverage. For example, if you're married and your spouse has the option of adding you to her health insurance, you can't decline that, pay your own insurance and then deduct the premium. If your spouse works for you, his or her premiums are deductible, as well. In order to do this, however, the insurance must be offered to all other employees, as well. Long-term health-care premiums are also partially deductible for yourself, spouse and dependents. Check the IRS regulations on this to determine what amount may be deducted.
Document Everything
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While the list is far from conclusive, the IRS website and its publications are helpful in determining what you can deduct as a self-employed worker. The most important thing to keep in mind is to keep records immaculately. This can't be stressed enough. Be fair to yourself and deduct everything you're entitled to, but should it come time for an audit, you'll have to support the deductions taken on your income taxes.
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References
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