Tax Deductions For Self-Employed Business Owners 101

For small enterprise owners that are self-employed, saving is not a choice, but an absolute necessity. Managing tax deductions properly is one way of doing so, by decreasing your total taxable income as a freelancer or self-employed entrepreneur. 

Tax deduction is a wise strategy to save money in the long run as your expenses are often intertwined with your home mortgage, family insurance, and many other expenses as a business owner. 

Read on to find out everything you need to know about the four main tax deductions. 

Mortgage, Rent, And Property Taxes

Is your office in the garage? Perhaps you have a garden-view office inside your family home? If you are working from home, you can claim some tax deductions that may save you a sizable percentage of your income. 

What Can Be Deducted

Business owners can claim the following five tax deductions when running their business from home:

• Part of rent/mortgage
• Property tax 
• Utility expenses 
• Repairs
• Maintenance costs 

The Steps 

Find out the dimensions of the percentage of space in your home that you ‘exclusively and regularly’ use for your business. This percentage will be used to calculate deductions.

Here is an example:

If you use 20% of your home to conduct your tailoring business, 20% of your expenses will be deductible. If the rent is $1,800 per month, $360 is the expense that will be considered as tax deductible. 

Another option is deducting $5 per square foot of the space used for your business, up to 300 square feet. This alternative is a simplified calculation which could even be lower than the main calculation. It is recommended to assess both methods before filing.

The IRS Publication 587 is a good place to look at other scenarios of tax deductions if you are self-employed and running a business. 

Medical And Dental Insurance Premiums

Did you get health insurance for yourself, your wife, and your kids through your business? If you did, there might be room for tax deductibles in your insurance premiums too. 

What Can Be Deducted

Self-employed enterprise owners can claim the below tax deductions on insurance payments according to IRS 537.

• Medical insurance for you, your spouse, and children under the age of 27.
• Dental insurance for you, your spouse, and children under the age of 27.
• Long-term insurance care premiums, based on the rules of the IRS Publication 535.

The Steps

All you need to do is include the insurance premiums as part of your taxable income by adjusting the cost percentile of insurance premiums, as these are not itemized deductions. 

However, if you are qualified to sign up for the insurance plan of your spouse’s employee plan, even if it is more expensive than your current plan and you decide not to sign up, tax-deductions on premiums are impossible. 

Another brilliant way to reduce insurance premiums is by referring to it as a medical expense. This is applicable only if you are paying the premiums from your self-employed earnings, and when the deducted amount is restricted to expenses of more than 7.5% of your gross income.

Education, Courses, And Supplies

Another option at your disposal is to deduct viable educational expenses from taxable earnings. 

What Can Be Deducted

Take a look at the following tax deductions you can make from money spent on education as a self-employed business owner. 

• Work-related educational expenditure
• Tuition, lab charges, and other fees
• Books and stationery supplies 
• Transportation and commute expenses 

The Steps

When you take educational courses that are directly related to your business such as improving your current professional expertise, this can be deducted from tax. Once you check IRS Publication 970, you will see that even educational courses leading to a degree are deductible as a tax expense. 

It will not work for you if:

• You are taking education to switch your current career.
• You are taking classes to make up for basic education in your current career. 

Take a look at the Lifetime Learning Credit or Opportunity Tax Credit to find out what else is tax-deductible in your learning expenses. 

Car Expenses That Assist You In Your Business 

Do you use your car often for your business? Do you need to drive to meetings or deliver stock? If this is you, deductions on your taxed income can help you manage some of your transport expenses. 

What Can Be Deducted

If you are a standalone business or freelancer, you can deduct over $1 per two miles when your vehicle is exclusively used for work-related events.

The Steps

• Maintain a mileage log for your vehicle in case of tax audits. 
• Calculate the total miles you have used for business-related purposes using your car. 
• Multiply the total miles according to the IRS standard mileage rate such as 57.5 cents in 2020.
• Deduct the total from the taxable income.

Instead of calculating the fuel-related expenses, you can include actual expenses of your car in the taxable year, including some of these examples:

• Tolls paid
• Repair and maintenance
• Licensing fees
• Rent/Lease charges for garage
• Insurance
• Gas

For an enterprise with multiple cars, this is the right way to create tax-deductibles from your vehicle expenses. For self-employed or freelance companies that lease their car, IRS Publication 463 is a relevant source to explore further.

Read more about:

How To Track Expenses Using Your Invoicing Software

Conclusion 

Being on top of your tax deductions and checking your rights meticulously will help you save a big percentage of your business earnings when you are self-employed. Moreover, tax deductions can help you keep all business expenses up-to-date for future tax-audits. 

As you can see, there are many areas of life including home, health, education, and car expenses that can represent significant tax deductions. It is always recommended to check the IRS publications regularly to stay in the loop about your possibilities and any updates and developments.