Running your own business comes with plenty of challenges. But contrary to what many Americans think, the Internal Revenue Service does not want taxes to be one of them.
That’s because while the tax code does have its quirks, the IRS offers a host of valuable tax breaks for sole proprietors and the self-employed that are intended to help their businesses succeed.
“In its broadest terms, you can deduct all of the ordinary and necessary expenses that relate to the production of income in the business,” said Jeff Warnkin, a CPA at the JL Smith Group in Avon, Ohio.
That means a self-employed individual who keeps good records can write off a host of items come April, and significantly reduce their income taxes as a result.
Here are seven of the most valuable breaks for the self-employed:
• Health insurance deduction. “One of the most commonly missed items is the self-employed health insurance deduction,” Warnkin said. The premium is wholly deductible against your income tax, he said, and the tax savings can be big depending on your plan. Furthermore, in tax year 2015 there is an increase in the “individual mandate” penalty for taxpayers who do not have health coverage, so paying for your own insurance plan also can prevent added fees.
• Travel expenses. You don’t have to drive to a worksite in order to deduct business-related travel, said Chris Kichurchak, vice president at Strategic Wealth Partners in Independence, Ohio. “A person can deduct all expenses for any travel as long as there is at least one hour of documented business discussion,” Kichurchak said. In addition to parking and airfare expenses, you can also get a break-even if you’re just taking a trip in your personal vehicle. The standard mileage deduction is 57.5 cents per mile traveled in tax year 2015 for business purposes. And thanks to online mapping tools, it’s easy to reverse engineer the mileage if you forget to jot down your odometer readings right away.
• Clothing and uniforms. Any specialized clothing is tax deductible as a business expense, including safety goggles, work gloves or a uniform. But take care to remember the IRS specifies these items “not suitable for everyday use,” said Grafton “Cap” Willey, managing director at professional services provider CBIZ MHM. “A claim that you are required to wear a business suit when you normally would not have one in your wardrobe except for business reasons will not work,” Willey said.
• Education and association dues. Books or periodicals relating to your business are deductible on Schedule C of your tax return, as are any courses or continuing education you take. Any professional dues for associations or unions are also tax deductible. Simply make sure you have the proper documentation for both the expense and its relevance to your profession.
• Retirement savings. You should be saving for retirement anyway, so the IRS offers a generous tax break to self-employed individuals who contribute to a qualified savings plan. One of the most popular is a simplified employee pension plan, or SEP, and can offer big tax advantages and can be created in minutes using any number of online providers. “A SEP is very easy to set up,” said Warnkin at the JL Smith Group. “It’s also very simple to fund.” Contribution limits are up to 25% of your net earnings from self-employment up to $53,000 a year. Those contributions are deductible from your income taxes, and can add up in a hurry if you’re making substantial savings to your SEP plan.
• Home office. Having a home office can unlock a host of valuable deductions, including breaks on your utility bills, property taxes and even upkeep on your home. The IRS allows self-employed Americans to take a break on these and other items based on the site of your office as a percentage of your home. In other words, a 200 square-foot office in a 2,000 square-foot home gives you a 10% break on qualified expenses. The catch, however, is that the tax man demands your office is used for “regular and exclusive” use, according to the IRS. “It can’t just be a corner of the living room,” Warnkin said. “It’s got to be a separate room, like a spare bedroom or something, that’s used exclusively for the business either administratively or because you meet clients there.”
• Tax and financial services. If any of the minutiae of the tax code gets to you or if you need help balancing the books, don’t fret. Professional services from a third-party accountant are tax deductible for your business, so you can get a tax break if you want or need an expert to check the math or regulations around your business activities in the past tax year.
Written by Jeff Reeves of USA Today
(Source: USA Today)