These 10 deductions for self employed are commonly missed. Make sure you’re claiming all your qualified deductions. Whatever deductions you take, remember to always keep fastidious and contemporaneous records. Some of the deductions below require a higher burden of proof then just a receipt.
1. Auto Deduction
If you use your personal vehicle in the course of conducting business, then you qualify for the auto deduction on line 9 of Schedule C. If you determine you qualify for this deduction then start a record keeping system to track your mileage (both business and personal) and vehicle expenses. Unlike most other deductions, receipts are not enough to claim this deduction. At the end of the year, you’ll need to be able to show how many miles you drove for business – the IRS will not accept an estimation.
See my article on claiming the mileage deductions, record keeping systems, IRS requirements, and some nifty examples.
2. Office Equipment
Equipment you use exclusively for your office (whether at home or at an off-site location) is 100% deductible. This means the desk and chair that sit in your office are deductible. This also includes computers and peripheral equipment (such as a printer) that remains 100% of the time in your office and is used 100% of the time for business.
Expenses must be necessary for the running of your business. You have a choice in how you deduct these expenses; either by depreciating them over a number of years or taking the section 179 deduction which allows you to claim the full cost of the item in the year it was purchased.
Equipment that serves for both business and personal use is considered listed property. Computers, printers, cells phones, and similar items are the most common examples of listed property. You can deduct 100% of the cost (section 179) or depreciated value if the proportion of business use of these items is at least 50%. Be ready to back this up – yes – you need PROOF that the business use of these items exceeds 50%.
Expenses you incur during business-related travel are deductible on lines 24a and b of Schedule C.
All of these travel expenses, other than meals, are 100% deductible.
Meals are 50% deductible. The IRS figures you’d be eating anyway so they only allow a partial deduction. To see more about deducting meals during travel, see my article on expensing business meals.
4. Advertising – Including Meals
Advertising expenses differ widely depending on your business model and industry. What one person classifies as advertising, another might classify elsewhere on Schedule C.
. For example, if you’re business is an online store, website expenses may not be best categorized as advertising. Your website IS your business. But for someone who’s business is completely offline, their website would be purely for promotional purposes.
And just like meals you have during business related travel, you can deduct 50% of the cost of other business related meals, such as those for promotional purposes. I go into detail about writing off meals in my article Expensing Business Meals.
There is a lot of conflicting guidance, both online and even in the IRS publications when it comes to more tech-related advertising expenses. For instance, would your yearly subscription to website hosting service, including a rented domain and website features (for instance WordPress) be classified as advertising (I would say yes) or under rent expenses on line 20b (I have seen this advised as well). I have seen it both ways and reading the IRS publications doesn’t give a specific answer for this, only general guidelines.
If you’re concerned, I would urge you to seek a licensed tax professional.
5. Office Supplies
This is simple, supplies you use for your office are deductible.
6. Retirement Contributions
Many self-employed don’t think about setting up and contributing to a retirement until later in their career. But when you do start thinking of making retirement contributions, these contributions can be deducted from your business income. If you choose a more complicated plan or hire a financial planner to assist with your retirement account(s), those costs are also tax deductible.
Financial planners will tell you to start contributing, even a little, as soon as possible. Setting up a retirement account, such as an IRA, can be simple, mostly free, and requires no contributions until you’re ready.
7. Health Insurance & HSA Fees
This is a tax deduction. Just like a corporation deducts the cost of providing health insurance to their employees, you get to deduct the cost of providing health insurance to your employee – YOU! See my article on which healthcare costs are tax deductible.
Any fees you incur in the course of doing business are tax deductible. This includes transactional fees from payment systems like Square and PayPal, bank fees like overdraft charges, monthly maintenance fees on accounts, credit card interest (only on your business credit card), membership fees, and many more.
9. Credit Card Interest
If you’ve made business purchases on your business credit card and haven’t paid the full balance, the interest you incur each month on those purchases is tax deductible. If you haven’t opened a separate credit card for your business purchases, this might be the time!
10. Home Office
This deduction is tricky and very few people actually meet the complete IRS definition of having a home office. There are a lot of articles on this with a lot of different advice. IF your home office meets the requirements, then you have two choices in how you claim a deduction for the business use of your home.
Talk to a licensed tax professional, please.
They can help you figure out if you qualify and then advise you on the ins and outs of taking this deduction. In some cases, taking the deduction may mean paying some capital gains tax on your home when you sell it, even if you are below the $250,000/$500,000 threshold.