If you’re newly self-employed, figuring out what you can deduct from your taxes can be confusing. The good news is that you can deduct the same kinds of expenses as the big companies, which are described in IRS Code Section 162 as “ordinary” and “necessary” expenses.
“Ordinary” expenses include the types of expenses that similar businesses have. For example, if you drive for Uber or Lyft, you’ll have expenses for the upkeep of your car, but you probably won’t have expenses for housekeeping, which an AirBnB operator might have.
“Necessary” expenses include the costs that someone in a similar trade or business needs to pay to operate that business. Expenses that personally benefit you are not deductible. For example, traveling to Orlando for a trade conference would be considered necessary. But taking the kids to Universal Studios while you’re in town would be a personal expense.
Here are examples of expenses that you might have for your business. For this article, we’re assuming that you don’t have employees.
- Supplies: This includes office supplies and similar things that are used as part of providing goods or services to your customers. This does not include items that you purchase for resale, which are accounted for as Inventory and Cost of goods sold.
- Continuing education or additional training: After you begin work in a new field, your continuing education and training is deductible. However, if you’re taking classes to train for a new field, that’s not deductible.
- Licenses or local business registration: If you need special licenses or permits for your business, these are deductible. Any fees for registering your business at your location are also deductible.
- Travel: This includes travel to visit clients or to attend conferences or seminars related to your business.
- Driving your car for business: Trips to meet clients, to the post office or the office supply store count as business miles. Tip: use a mileage app on your phone.
- Meals: Meals, when you’re traveling, are 50% deductible. The deductibility of meals with clients is unclear as of right now due to the Tax Cuts and Jobs Act reform. For now, track these two kinds of meals separately.
- Advertising and marketing: This includes business cards, signs, website expenses or any other expenses for promoting your business.
- Equipment, including laptops and tablets: If you buy equipment that will last more than a year, several provisions in the current law allow you to deduct the entire cost in the year you buy it. Through 2023, you can use bonus depreciation and deduct 100% of the cost of qualifying equipment. Section 179 allows deduction of up to $1 million per year, as long as you have taxable income to cover that deduction. And if the items you buy cost less than $2,500 per item, you can elect to deduct the entire cost when you buy it. Some of these provisions also apply to real estate and leasehold improvements. Contact our office and we’ll guide you through these complex regulations.
- Home office expenses: The simplest method is the IRS safe harbor method, which allows you to deduct $5 per square foot up to 300 square feet. Alternatively, you can allocate expenses for your whole home based on the relative square footage.
- Home internet, cell phone, and other shared expenses: If you use any of these devices for business needs, even partially, you can deduct the portion you use for business. Track actual use or estimate the business portion based on a sample of use over a few days or weeks.
- Inventory and Cost of Goods Sold: If your average sales over the last three years is greater than $10 million, you can only deduct the items you buy for resale as you sell them. The unsold items are tracked as inventory. Below that threshold, you’re not required to track your inventory and you can deduct the cost of items for resale as you buy them.
Additional Expenses When You’re Self-employed
In addition to these business-type expenses, here are some additional deductions you might have when you’re self-employed. These expenses reduce your taxable income, but not your income from self-employment.
- Health insurance premiums: When you’re self-employed, you can deduct 100% of the health insurance premiums you pay for health insurance for yourself, your spouse and your dependents. This also includes dental, vision and long-term care insurance.
- Self-employment tax: When you’re self-employed, you’ll pay self-employment tax, which is Social Security and Medicare tax. Since you’re paying both the employer and the employee share, you get to deduct the employer half from your income tax. Self-employment tax is levied at 15.3% of your net income from your business up to $128,400 for 2018. Above that threshold, it’s only 2.9%.
- Retirement plan contributions: You may also be able to deduct contributions you make to a traditional IRA, solo 401(K) or a SEP IRA. Call our office to discuss the best option and for help in setting up the perfect plan for you.
Keep Documentation of Your Expenses
The most common reason that the IRS disallows deductions is lack of documentation, so make sure you keep all your receipts.
Schanel & Associates is committed to supporting you and your business. Contact us today to ensure you are maximizing your self-employment tax deductions.
Schanel & Associates is a CPA firm specializing in accounting, tax, business valuation and litigation support serving Palm Beach, Martin and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.
Glenn Schanel is the founding Principal of Schanel and Associates. Glenn Schanel is a CPA with over three decades of experience helping people and organizations manage, make sense of and benefit from their finances. He oversees areas that include auditing, accounting, tax, business valuation, forensic accounting, litigation support and other consulting services to both business and individual clients.