When preparing for the upcoming tax season, there are items that should be considered as possible tax deductions on a business tax return. To maximize deductions, credits, and a possible refund, review the following expenses that may help reduce your company’s tax liability.
Health Insurance
A health insurance tax deduction is conditional and is based on whether a self-employed individual is qualified to join their spouse’s medical plan. If you do qualify, you can deduct medical and dental premiums for spouses, dependents and children below the age of 27. This deduction is an income adjustment, not an itemized deduction, so it is not necessary to itemize it to claim it on a federal income tax return.
Transportation
A self-employed person may deduct mileage costs for business-related travel using their own car. However, the individual will need a mileage log to prove the travel expense to the IRS. Alternatively, the individual can opt to deduct actual car-related expenses such as gas, oil, depreciation, licenses and other car-related expenses. If there are five or more cars registered to the individual’s business, actual expenses will need to be reported on the tax return. Regardless of the method used, the mileage log will be necessary to substantiate business use to the IRS. The log should not only include the beginning and ending mileage, but who the individual met with and the business purpose.
Education
If the taxpayer as out-of-pocket expenses for skills that can be used at work, the cost of that education is tax deductible. This tax deduction covers tuition, lab fees, supplies, books and transportation to campus.
Home Offices
Most self-employed individuals have a dedicated workspace at home. If so, the individuals can claim on their tax return for the percentage of their floor plan the home office takes up. The deduction may apply to a portion of the mortgage and other direct expenses paid on the entire house. Alternatively, the taxpayer can opt for a simplified deduction, which allows a $5.00 per square foot deduction up to 300 square feet for a maximum deduction of $1,500.
Self-Employment Taxes
One of the most common adjustments is for one-half of the self-employment tax. The deduction reduces taxable income.
Retirement Savings
Retirement options for self-employed people may also yield deductions. If the self-employed individual is signed up for a solo 401K, they can leverage deductions up to $58,000 (in 2021) on contributions to that fund. If the individual is over 50, they are eligible for an additional $6,500. There are several deferred compensation options available which will reduce taxable income.
Office Supplies
While not costly, expenses from office supplies do add up. Home offices typically require a lot of supplies, from pens and paper clips to paper and ink for printers. Even if the supplies were not used in the current year, they can still be included on the tax deduction once receipts prove their purchase. For items that have a shelf-life of longer than a year, the cost of the item can be deducted in the year when it was bought.
Business Insurance
Certain insurance premiums can be deducted for self-employed individuals. Business insurance, accident insurance, workmen’s compensation, and employee health insurance are all covered under this tax deduction. Note that workmen’s compensation and employee health insurance are only available to employees, not to the business owner on Schedule C. However, a Section 105 plan may provide some tax benefits if the business employs a spouse.
Phone and Internet Costs
If a self-employed individual’s business relies on the internet, these expenses for phone and internet can also be deducted. If the business owner has a family plan, only expenses related to the business can be deducted as a business expense. If the connection is registered to the company, it may be possible to deduct the entire amount of the bill.
Loan and Credit Card Interest Payments
If the business has loans registered to itself, the interest on the loan payments can be deducted from the company’s taxes. Many people believe that this is limited to a business credit card, but that’s not necessarily true. If the company uses a personal credit card business expenses, the interest on the payments can be deducted just the same. If the credit card is mixed use, both personal and business, only the interest expense attributable to the business purchases can be deducted.
Start-Up Costs
Up to $5,000 in start-up costs and $5,000 in organization costs can be deducted under this schedule. These costs include registration fees and other monetary details that the business must pay to get started as a company. Costs such as research, travel, marketing, and professional fees prior to the opening of the business fall into this category.
Business Travel and Meals
In the event that there is travel for business, travel expenses can be deducted, including the cost of meals. For tax years 2021 and 2022, the deduction for a meal purchased in a restaurant is 100%. However, if travel expenses include the cost of a vacation, the deductions do not cover travel expenses for a spouse or children.
Membership Fees
Some professionals, such as engineers and lawyers, are required to join professional organizations that charge fees. If membership fees are part of the business, those costs can be claimed as an expense of the business.
Advertising
Advertising that helps promote the business can contribute to business expenses, but keep in mind that advertising toward lobbying cannot. Conventions and political party expenses are also not acceptable as advertising deductions.
Qualified Business Income Deduction
This deduction, which is fairly new, allows business owners whose taxable income is less than $164,900 (on a single return, $329,800 for a joint return) to claim up to a 20-percent deduction on the lower of the taxable business income or the total taxable income on the individual tax return. Even if the total taxable income is above the limit, some amount of deduction can be claimed against taxable income.
Knowing which business expenses are tax deductible can have a significant impact on tax liability. This list includes some of the expenses self-employed individuals should consider when completing a tax return. To learn more about self-employed individual tax deduction considerations and requirements, contact U.S. Taxes, Inc. at inquiries@ustaxesinc.net or 1-609-588-8181.