March 28, 2017

Overlooked tax deductions for the self-employed

Are you self-employed? Whether you run your own business or freelance on the side, when it comes time to file your tax return, keep in mind that there are important tax breaks that can add up to considerable savings.

Fortunately, parts of the tax code are designed to provide incentives for taking entrepreneurial risk. From education costs to business miles, there are expenses you’re entitled to deduct as a self-employed taxpayer that can sometimes be forgotten.  

As you finalize your 2016 returns, don’t miss out on the following opportunities that can help retain more of your self-earned income.

1. Health insurance premiums

If you are self-employed and paying health insurance premiums, those premiums may be tax deductible on page one of your tax return without regard to the normal need for medical expenses to total up 10 percent (7.5 percent if you’re over 65) of your adjusted gross income (AGI).   

2. Branded clothing

Clothing that includes your company name or logo may be tax deductible depending on its purpose. Branded T-shirts, hats and other items you or your employees wear can be considered advertising expenses that you can write-off. The same goes for other promotional materials, such as handouts and store signs.

3. Education

Continuing education that is required to maintain your license or professional designation is deductible, as are travel and lodging expenses to attend those classes. In addition, more general business training and seminars may also provide a tax benefit. To justify the deduction, it’s important to connect the expected outcome of the class or program to your business. Employers also have the ability to provide and deduct up to $5,250 in nontaxable education reimbursements to their employees.

4. Cost of doing business at home

If your home is your primary place of business, and you have space exclusively used for your business, you can deduct a portion of your home’s operating costs, including taxes, mortgage interest and depreciation. To qualify for the deduction, make sure you document that the portion of the home you claim for business is solely used for work-related activities. This is reported on Form 8829.

First, determine the portion of your home that is business related, either as a fraction in terms of rooms or a percentage of square feet. You can then claim the business percentage of general operating costs (repairs, insurance, cleaning, security, utilities, etc.) as well as 100 percent of costs that may be specifically allocated to the part of the home used for business.

Note that home costs claimed can’t be deducted in the current year if they would create or increase a loss from the business. Costs not deductible in the current year can be carried over to future years when there may be income from the business.

There is also a safe harbor which allows you to deduct $5 per square foot (up to a maximum of 300 square feet) instead of calculating the above deductions.

5. Automobile expenses

Business deductions for auto use are based on “business miles” – either absolute business miles if the mileage rate is claimed, or the percentage of business over total miles if actual expenses are claimed. Deductible auto expenses are enhanced if your home is your principal place of business. Since “commuting mileage” from your home to your place of business is not deductible, all business trips can be written off if you primarily work from home. 

People who own their cars have two choices for deducting costs. They can take the mileage amount of $.535 for all business miles, or they can add up all their costs (gas, oil, maintenance, insurance, repairs, depreciation, etc.) and deduct the business percentage of those costs. 

When factoring in depreciation, if the car was purchased in 2016, there is a maximum of $11,160 allowed in depreciation expense (factoring in bonus depreciation). For an SUV or passenger truck in excess of 6,000 pounds, the allowed deductions are greater than that.

For those that lease, the mileage rate isn’t permitted. Rather, they can take the business percentage of costs, including their lease payments.

For all car drivers, there may be limits on the current deductibility of their costs if they are driving what are defined by the IRS as “luxury autos” – although the cost/value of vehicles that would create these limits is far from luxurious.

6. Interest expense

Many businesses are bootstrapped on credit cards, home equity loans and loans from friends and family. If you are using certain cards only for business, then any interest on those cards will be deductible against your business income. Similarly, interest on other loans taken to start or continue your business is deductible. You must be able to identify and prove that the proceeds from the loan went into your business in order to justify the interest deduction.

There are tremendous economic risks and rewards to being an entrepreneur. Instead of being viewed as an adversary, the government and its tax rules can help you reduce your taxable income when your business expenses are properly accounted for and documented.

Whether you have filed your return or are in the process of getting it prepared, there is still time to take advantage of these ideas. Please contact your CBIZ tax professional.

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