Tax Prep & Planning

Looking for Self-Employed and Small Business Tax Write Off Opportunities?

Let’s face it – tax time can be a stressful time, especially for those subject to the 15.3 percent self employment tax. 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 some commonly overlooked tax benefits. Each tax benefit can potentially lead to substantial savings. Here are some small business owner or independent contractor tax deduction strategies:

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:

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.

  • 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).

Home Office Deductions

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

While there are specific 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.

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 – 57.5 cents for 2015.

Education Expenses

When most people hear the word “tuition” they cringe. But, saving for your own or your dependent’s education has its own tax benefits. Educational savings plans like 529s and Coverdell Educational Savings Accounts offer great tax breaks. Qualified distributions from these plans are tax free. Many states may offer deductions or credits for contributions to their 529 plans.

And, if you do still have student loan payments, you may be able to deduct interest paid. (This is typically $2,500 or the amount of interest you actually paid—whatever the lesser amount is.) This benefit may be phased out based on your adjusted gross income.

If you take professional development courses or purchase research material, books, magazines, or even online subscriptions that are 100 percent work-related, this is another potential deduction.

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.

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.”

To potentially reduce your gross taxable income, consider the above small business and self-employed tax deductions. If you have a more complex tax situation, you may want to consider enlisting the help of a tax expert. Don’t get overwhelmed and try to do it yourself. Take the time to do what you love and outsource your tax-related needs to the pros.

Connect with a Tax Advisor now.

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