Self-employed tax deductions: A cheat sheet

small business tax deductions

Let’s face it – tax time can be a stressful time, especially for those subject to additional small business tax concerns or those looking to take self-employed tax deductions. In fact, self-employed individuals and small business owners sometimes take an extra gasp of air when it comes time to file.

But there is a silver lining . . . This type of taxpayer may be entitled to commonly overlooked small business and self-employed tax deductions. Each tax benefit can potentially lead to substantial savings.

We’re here to help. We’ve compiled a cheat sheet of the most common tax small business deductions you may not know you can claim.

1 – Retirement savings

Who said you had to be employed by a third party to take advantage of retirement savings plans? Retirement savings plans – like a Solo 401(k) or SEP IRA – have a sizable benefit to the self-employed crowd. While you can tuck money away in your piggy bank for retirement funds, you are also doing yourself a favor by reducing your overall taxable income.

Here are the tax benefits of each type of fund:

  • Solo 401(k): A Solo 401(k) has the same tax benefit as a traditional 401(k), which is this: Contributions are not taxed in the year contributed and the account balance grows on a tax-deferred basis. But, like a 401(k), you are taxed when you withdraw funds from the account. As an alternative, some 401(k) plan documents allow a designated Roth option, allowing you to save after-tax dollars. However, this has to be designated by the solo proprietor in the plan. Distributions from the Roth account won’t be taxed when you withdraw your funds later down the line when your tax bracket will likely be higher.
  • Simplified Employee Pension (SEP) IRA: SEP-IRAs have tax-deferred growth potential until withdrawal and there are no mandatory contributions or annual tax filings. Be aware that contributions must be in accordance with the allocation formula adopted in the SEP plan document (likely Form 5305-SEP).

Contributions to a Roth IRA aren’t deductible. However, distributions from a Roth IRA won’t be taxed when you withdraw your funds later down the line when your tax bracket will likely be higher.

2 – Home office deductions

Home office write-offs are complex, but beneficial as they are another way to deduct from your total taxable income. Many small business owners are leery of the home office deduction due to confusion, but it can be a valuable deduction.

While there are rules to operating a home business, if you do qualify, you can calculate home office deductions in two ways: the regular deduction method or safe harbor method. The regular method involves tallying overall home expenses and allocating a portion to your office, while the safe harbor method is an easier approach using the following formula: multiplying the allowable square footage of your office by a rate of $5. (The maximum safe harbor deduction is $1,500.)

Either way, the home office must meet strict regular and exclusive use tests in order to deduct expenses.

3 – Car expenses

If you use your car for business purposes, you can deduct the vehicle expenses for business use of your car on your tax return. You can deduct actual expenses incurred while driving or use the standard IRS mileage rate – 56 cents per mile in 2021.

To easily track your car mileage, consider an app-based mileage tracker such as Everlance. You can stay compliant with the IRS and say good-bye to pen and paper tracking.

4 – Travel expenses

Business travel expenses offer additional tax deduction opportunities. When a trip is primarily for business purposes – or helpful and appropriate for the success of your business – you can deduct at least a portion of the trip’s cost. Things like meals, entertainment costs, airfare, conferences, and even dry cleaning may be written off as long as they are deemed necessary to your business trip.

5 – Healthcare expenses

The increased tax complexity also means new tax benefits in the form of deductible expenses which could include health insurance premiums. “You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents,” notes the IRS. For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.”

Also, the cost of health coverage for self-employed individuals and more-than-2% S corporation shareholders is not a business deduction. Instead, the premiums are deducted on the owner’s personal tax return.

6 – Taxes

Believe it or not, your own business taxes offer some small business tax breaks. In fact, you may deduct certain federal, state, local, and foreign taxes directly related to your business as an expense.

7 – Employee and contract worker wages

As a small business owner, your income from the business is not deductible, but payroll for your employees (W-2 employees) or contract labor (1099-NEC contractors) is.

If you know you will be paying a contractor at least $600, send them a 1099-NEC form and track your payments to them!

8 – Rent on business property

The cost of renting a business office space — like a storefront or office — is deductible.

9 – Advertising costs

A big part of growing a small business is publicizing it. Thankfully, ordinary advertising costs are deductible. Business cards, online advertising costs, billboards, mailers, signs, giveaway items (subject to certain limits), your business website, postcards, magazine advertisements, and marketing agency fees are some of the examples of acceptable business deductions.

10 – Professional fees

As a small business owner, it’s common that you’ll need professional legal, tax, and even business coaching services. These are all tax-deductible expenses for small businesses.

11- Professional supplies

Generally, the cost of materials and supplies used in the course of a trade or business may be deducted as a business expense in the tax year they are used, according to the IRS. Items acceptable for a deduction include things like cleaning supplies, paper, and even supplies used to produce or ship products. This is another important area to show documentation to the IRS, if you are audited. Make sure to document everything and keep the documentation with your tax records.

12 – Insurance coverage

Many small business owners hedge risk by having insurance. (Think umbrella policies, business liability insurance, malpractice coverage, any insurance related to your trade, business, or profession, but not life insurance for the business owner). These types of insurance are deductible.

However, there are two rules to note for health coverage. A small business owner may be able to claim a self-employed health insurance deduction for their own coverage (discussed above).

A small business may qualify to claim a tax credit for up to 50% of the health premiums (a better tax break than a deduction) for SHOP Marketplace coverage.

Pro tip on small business tax write offs

As a small business owner, not all business expenses qualify as a tax deduction – there are some specific IRS rules you need to follow when it comes to small business tax write offs: they must be ordinary and necessary.

  • An ordinary expense is one that is common and accepted in your trade or business.
  • A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

So, determine what deductions you qualify for, and make them on your upcoming tax return. Here’s our small business tax prep checklist to help you get organized. Remember: you are not alone in this!

Final thoughts on small business tax breaks

While small business owners are educated on many areas of the business, taxes and bookkeeping may not be one of them.

Luckily help is at your fingertips! Whether you’re looking for small business tax breaks, bookkeeping, payroll, or just need general small business tax help, we’re here for you.

Rely on our team of small business certified tax pros to keep your business on track so you can get back to what you love. Find an advisor at blockadvisors.com.

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