Seven Tax Breaks for the Self-Employed You Might Forget
When you first choose to pursue self-employment, quite a few well-meaning friends and family members will warn you about the reduced financial security and increased unpredictability you can expect. While that might be true in many cases, it certainly is less so than it used to be. Although finding a solid nine-to-five job might have once meant a solid financial future for as long as you cared to keep the job, today’s economy means that traditionally employed individuals frequently find their finances just as unpredictable as those of the self-employed.
In addition, once you begin working for myself you will be able to benefit from a wide array of opportunities, both tangible and intangible, to which you previously did not have access. One of these is a variety of exclusive tax breaks for the self-employed, several of which you might easily forget are available.
TurboTax is one example of do-it-yourself tax software that can walk you step-by-step through even complex business taxes.
Large companies and corporations are allowed to deduct certain expenses throughout the year. They normally have teams of tax professionals, however, to scan the company’s books for expenses they can deduct, like mortgage payments and rent. Conversely, the IRS allows the same benefits to be deducted by the small business owner. This means you may be able to benefit financially from the space you use for work in your own home.
The rules and guidelines governing home office deductions can be quite complex. In most cases, for example, you will need to have a designated area of your home set aside for work to be able to deduct a portion of your utilities, rent or mortgage payments and any related expenses. If you are not clear on which regulations apply to your situation, it is best to consult a tax professional.
Internet and Phone
Workspace deductions are just the start of the savings you could enjoy as a self-employed individual. For example, you can deduct your internet and phone expenses for work as well. Before taking advantage of these tax breaks, it is important to separate personal internet and phone usage from your business activities. One of the keys to ensuring that you do so correctly is adding up the expenses that relate directly to your business. For instance, if you have a second phone line solely for business activities, you can deduct 100 percent of its cost.
Do not forget your business-related automobile expenses, either; after all, large companies can deduct the mileage on their vehicles when they are used for business purposes, so you should do the same. This is why most employees are required to report this information to their employers.
You should maintain similar records of your business travel throughout the year. At the end of the year, you will have the option of using the standard deduction rate (established by IRS) or the actual documented costs. Simply be prepared to defend these expenses with your records if you happen to be audited.
Interest on Business Credit Cards
Business credit card interest can add up quickly throughout the year. Tracking and totaling the interest on multiple credit cards is beneficial to those of you who keep great records, since it can be deducted at the end of the year. With the high interest rates and charges associated with many of these cards today, these are business expenses that you do not want to ignore or forget.
Meals and Entertainment
The best business deals are often made over lunch and dinner meals. This is why business meals and entertainment are added to the lists of tax breaks. Companies all over the world send their employees to such meetings all the time to work on company projects. Therefore, the amount spent on food and common business entertainment can also be deducted at the end of the year (IRS sets limits on how much of each type of expense can be deducted). You can also take advantage of these benefits. Therefore, it is important to keep the receipts from every business meal or similar expense.
Business travel around the country and abroad can also be tax deductible. However, before taking advantage of these benefits, you should review all applicable restrictions. Obviously, taking the family to the Bahamas does not count if there is no business activity involved. According to IRS guidelines, these business trips should be planned in advance and you must conduct business with a client, potential customer, supplier or similar business contact.
When a company sends their employees to job-related training classes, they are allowed to deduct these expenses on their taxes at the end of the year. Small business owners are allowed to take advantage of the same privileges. However, there are limitations that you should be aware of before deducting the cost. The courses taken must relate to your business and its activities; for instance, if you are a self-employed accountant, advanced college accounting courses may be deductible. Again, if you are not sure how these rules and guidelines apply to your specific situation, it is best to consult with a tax professional.
How do you complete your taxes each year?
Operating your own business can be an exciting and rewarding opportunity. However, doing so is not without its challenges. Taking advantage of unique tax deductions like these can help increase your odds of long-term success.