What Business Deductions Are You Eligible to Take When You Are Self-Employed?

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Tax Time Doesn’t Need to be a Drag

For the self-employed, tax time can be extra stressful: all year you’ve been paying estimated taxes, and now the government expects you to come up with even more. Unless, of course, you can produce a lengthy list of justifiable deductions.

In addition to keeping some cash in your pocket, deductible expenses can produce a secondary benefit for you and your family: a nice car, delicious meals, or a business trip that doubles as a cut-rate vacation.

You might think it’s cumbersome to log every single expense, but each receipt can save you big bucks…

Deductions don’t have to be a drag, but if you want to write off, say, a sports car, or a trip to Waikiki, then you’re going to need to pay attention to the rules.

A CPA can help you parse the tax code to find new deductions, but unless you’ve saved your documents—receipts, notes, schedules—your “expenses” will be strictly hypothetical.

How to Survive a Tax Audit, and Avoid One Too

To survive an audit, you’ll need to produce a paper trail to prove…

1) where you were
2) who you were with
3) what you bought
4) why

Any CPA worth his salt will recommend you keep a record of all business-related income and expenses, including detailed notes.

After all, three years on, it’s hard to say exactly why you paid for five steak dinners; Who were you with? What was the purpose of the meeting?

If you have a hard time keeping track of your receipts, then a service such as ShoeBox can save your bacon later on. ShoeBox is a free app that lets you use your smartphone’s camera as a photo scanner. With ShoeBox, you can scan, tag, and date receipts. Upload your documents to Dropbox or another cloud-based storage system, that way you will always know where they are.

You might think it’s cumbersome to scan and log every single expense, but each receipt can save you big bucks in the long run.

Below are four common categories of expenses for freelancers, solopreneurs, and small business owners. If a legitimate deduction does not fit into one of these categories, don’t freak out. Just create a new category and file it under “Other Expenses.” If the IRS comes knocking, at least you’ll have your documents in order, and your expenses itemized.

Relevant Categories of Expenses

  • Advertising: This includes web-marketing and any expenses related to social media. Everything associated with your website is deductible, including hosting or domain name fees, software, and licensing fees. If you are using traditional media to advertise your business, keep track of how much you spend on paper and printing. You can deduct table fees or other business expenses incurred while promoting your company at trade shows, just make sure to file your travel costs separately.
  • Travel: No matter how you get there—car, plane, train, boat—if you’re traveling for business, then the expense is deductible. Taxi fees, baggage charges, tolls, parking fees and the cost of fuel are all legitimate deductions. If you’re driving your own vehicle, the best thing to do is keep a mileage log to keep track of transportation costs related to business travel. Again, be sure to keep separate records whenever possible, especially if you are combining personal and business travel.
  • Insurance: As part of the Small Business Jobs Act, self-employed taxpayers, including sole proprietors reporting income on a Schedule C (that’s you, freelancers), are able to deduct the cost of health insurance for themselves and their families. However, in order to deduct your health insurance expenses, your business must generate a net profit. If you have zero profit or a net loss, then you can still deduct the cost of premiums, but that’s it.
  • Home Office: If you have a dedicated home office for your business, or if you use some portion of your property exclusively for business purposes (such as storing items), then you can claim a home office deduction. Home office deductions cover rent, utilities, and improvement. In order to determine your deduction, calculate the percentage of your home used for business purposes, even if it’s only 12 square feet, and multiply that percentage by your total home expenses for the year.

There’s no sense in paying more taxes then you need to. Just make sure that your deductions are legitimate, and you have documents to back up your claims.

Did we miss anything? If you’re a tax professional, let us know what we missed in the comments section below. Thanks in advance!

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