Whether you’re a solo entrepreneur or the owner of a large business, there are plenty of benefits to being self-employed — one is the tax deductions at your fingertips. Taking advantage of eligible deductions is key to saving money and reducing taxes as an entrepreneur.
Here are six deductions every small business owner should understand:
1. Business expenses
Business deductions include anything ordinary and necessary for your trade or business, such as:
- Employee salaries and benefits
- Labor paid to independent contractors or freelancers
- Professional fees, such as accounting or legal fees
- Rent for your office space or equipment
- Interest paid on real estate and business operations
- Equipment, such as cell phones, computers, and printers
- Office supplies, such as pens, paper, postage, and furnishings
- Marketing and advertising costs
- Continuing education costs
2. Home office expenses
If you use part of your home for business, you may qualify for the home office tax deduction. According to the IRS, you are eligible for it if you meet two basic requirements:
- Regular and exclusive use: you regularly use part of your home for conducting business.
- Principal place of your business: you use your home as your primary place of business.
The home office deduction allows you to claim direct and indirect expenses on your tax return. Direct expenses are 100% tax-deductible and include items related to your home office, such as:
- Improving floor covering
- Upgrading bathroom fixtures
- Installing new shelving and window treatments
Indirect expenses are partially deductible based on the size of your office. These include everyday costs required to run your home, such as:
- Rent or mortgage interest payments
- Property taxes
- Property insurance
- Maintenance
- Cleaning
- Utilities
3. Vehicle expenses
If you use your vehicle solely for business, you can deduct its entire cost. However, if you use it for business and personal purposes, you can claim the portion used for your business.
You can keep track of your actual vehicle expenses throughout the year (such as gas, oil, repairs, and insurance) or claim a standard amount per business mile driven. Log your mileage on paper or automatically with an app like MileIQ that tracks your vehicle’s location. Then you categorize each trip as personal or business.
4. Insurance expenses
Having the right insurance for your small business is essential to surviving any unexpected hardships that may come your way. And the good news is, the following are tax-deductible if you’re self-employed:
- Business liability insurance
- Business interruption insurance
- Errors and omissions insurance
- Malpractice insurance
- Property insurance
- Cyber theft insurance
- Auto insurance
The catch with auto insurance is that you can only deduct premiums if you use your vehicle entirely for business or have a separate commercial auto policy. If you claim the standard mileage rate, it includes insurance, gas, and maintenance expenses.
With health insurance, your premiums are tax-deductible unless you’re eligible to participate in another employer’s plan. If you’re uninsured and unsure where to start, visit the Healthcare Marketplace at Healthcare.gov.
Also, note that you may qualify for discounts when you belong to various groups and buying clubs. For instance, Costco has health insurance for individuals and AAA offers health insurance for its members.
5. Travel and meal expenses
Most of your expenses are deductible if you have a multi-day business trip. For example, your airfare, ground transportation, and lodging are all 100% tax-deductible. However, your meal costs are typically deductible up to 50%. But due to the pandemic, the IRS instituted a temporary 100% deduction for business restaurant meals in 2021 and 2022.
If you extend your trip into a vacation, you can also save money by deducting the portion of business expenses from your total cost.
6. Retirement contributions
Traditional retirement contributions are another excellent way for entrepreneurs to save money. They reduce your taxable income for the year and help you boost your nest egg.
If you don’t already have a retirement account, here are two popular plans:
- SEP IRA: A plan for anyone self-employed with or without employees. For 2022, you can contribute up to 25% of your compensation or $61,000, whichever is less.
- Solo 401(k): Like an employer-sponsored 401(k), this plan is only for entrepreneurs with no employees other than a spouse. As an employee, you can contribute up to $20,500 in 2022, or $27,000 if you’re over age 50. As your employer, you can also contribute up to 25% of your compensation or $61,000, whichever is less.
If you already run a business or are thinking about becoming an entrepreneur this year, don’t miss these legitimate ways to reduce your taxes, cut expenses, and save more money. If you have questions, be sure to consult a tax professional for specialized advice.
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