For the self-employed individual, claiming back tax on your expenses is a vital part of reducing annual outgoings.
Expenses – or deductibles – are essentially allowances offered up by the government in order to reduce the amount of tax you have to pay. Deductibles are an important part of leveling the financial playing field between self-employed and those in the traditional working environment that don’t have the deal with extra financial commitments. However, unlike those in employment, it’s the responsibility of the self-employed individual to know what they are entitled to.
Defined by the IRS as being either being ‘ordinary’ or ‘necessary,’ expenses encompass a range of different things, although some are more obscure than others. While you might remember to claim back on those new tools you bought or the laptop you upgraded to, there are plenty of other claims it is easy to forget about, but that you really should capitalise on.
1. Rent: Offload Tax Costs While Keeping a Roof Over Your Head
Some small businesses require property for you to work in. This could be anything from an office or store to a warehouse. Wherever you are based, if you do not own the property, you can claim the rent back. It’s easy to forget, and even easier to not consider, but providing you have no ties in ownership or equity to the property and you use it purely for business purposes, you can see huge savings on your tax returns.
2. Insurance: Don’t Take A Financial Hit For Protecting Your Business
Insurance can be a major expense, but it’s not one that you can do without. Small business owners should aim to be covered by many different types of small business insurance, but this can quickly become a financial burden. Happily, tax relief is available for insurance costs, meaning you can acquire all the protection you need and reduce the costs through deductions.
3. Vehicle Expenses: You Can Claim On More Than Just Fuel
Using your car for business leads to additional costs. You don’t only have to pay for fuel, but also depreciation, wear and tear, repairs, insurance and much more. The good news it that car use is deductible from your taxes, and you should be taking advantage of this.
In the United States, the United Kingdom and a number of other countries, you can make these claims in two ways.
The first is the standard mileage rate, which essentially means you record the exact mileage you travel for business purposes, and the state offers up a deductible amount per mile on your tax return covering everything from fuel to services. This is the easier of the two methods.
If you believe that the millage rate isn’t covering your expenses well enough, you can go for actual costs, claiming on specific repairs, fuel costs and more through receipts and invoices. This can get tricky if you are using your car for both personal and business use, as you have to fairly divide up expenses occurred through both methods of use.
If you use your vehicle only for business, then the actual expense method is likely to save you more in the long run, however, if you also drive it for personal use, then it is far easier and safer — when considering the chances of making mistakes — to use the mileage method.
4. Retirement Plans: Save Now and Avoid High Taxes
Now this one is a big one and something the self-employed so rarely take advantage of. In the United States, and many other nations across the globe, sole traders are encouraged to set aside money for the future through a very generous tax relief system.
The IRS gives self-employed individuals a number, a percentage of their wages that they can put into a pension plan. This money is nontaxable, meaning anything you put into a retirement plan remains 100% yours. What’s more, it reduces the amount of remain money you can be taxed on, as whatever money you set aside for future you does not count towards your annual income.
Many self-employed people choose not to operate retirement plans, but when presented with the option to save on tax and secure your financial future, it seems ridiculous not to!