If you’re self-employed, tax time can be extra stressful. You have a lot more paperwork to do, especially if you’re planning to take self-employed tax deductions.
The best way to prepare for tax time is to accurately track your expenses throughout the year, which will make everything much easier when tax filing rolls around. Here’s a helpful cheat sheet for the expenses you can write off, the ones you can’t, and how to track all your deductions.
The information in this article is intended for LLCs or sole proprietorship in California, but these deductions may apply to other businesses. If you’re unsure, consult with a tax professional.
Common Business Write Offs
There are several types of write-offs that are common to most businesses. Here are some of the standard deductions:
Self-Employment Tax Deductions
The self-employment tax is your Medicare and Social Security taxes, which are taxed at a rate of 15.3%. Typically, these taxes are split between employer and employee, but as a business owner, you’re responsible for all of them.
That said, you can deduct half of this tax from your net income as a business expense.
Home Office Deductions
The home office deduction covers your workspace used for business. You may rent or own, but it can be complex. If you’re audited, you will have to defend this deduction to the IRS.
You may also be able to deduct for other home office expenses, including home depreciation, homeowners’ insurance, and mortgage interest. If your home office comprises 15% of your home, you may be able to deduct 15% of your electric bill.
Business Insurance
Any insurance premiums that you pay to protect your business, such as business liability insurance, car insurance for a business vehicle, and fire insurance may be deductible.
Vehicle Use Deduction
If you use your vehicle for business, some expenses are tax deductible. It’s important to keep detailed records of the business use of your vehicle, however, including records of dates, mileage, and business purpose. You can calculate this deduction using standard mileage determined by the IRS or your actual expenses.
Depreciation
Some business items have value that depreciates with regular use, and you may recover that loss with a deduction.
Business-Related Meals
Meals that you have while meeting with clients, business associates, or customers may be deductible at 50% of the meal. You have to be able to prove this with records, however.
Office and Supply Expenses
You can generally deduct your expenses for office supplies and materials that are used throughout the tax year, such as copy paper, paper clips, pens, and pencils. You may also be able to deduct books or equipment that are used for your business, as long as they’re not items that will last more than one year. If so, they would fall under depreciation.
Business Travel
You may deduct business travel under certain circumstances. It must be longer than the average workday and require sleep, and it must be located outside of the area where you normally conduct business (tax home). You must also plan the trip with intent to conduct business.
These deductions are heavily scrutinized by the IRS, so it’s vital that you keep detailed records to validate your deduction.
Professional Fees and Dues
If you have professional fees related to your business, such as legal fees, taxes, or professional development costs, these are considered tax-deductible expenses.
Education Costs
Education costs may be deductible if they’re directly related to improving your skills for your current business or profession, but not if they’re unrelated. For example, you may take a course on real estate accounting as a real estate agent and deduct it.
Taxes and Licensing
Your business taxes and licensing fees may be deductible, including federal, state, local, and foreign taxes.
Commissions
Any commissions you pay to agents or third-party vendors to conduct business may be deductible, as long as they’re directly related to running your business.
Qualified Business income
The qualified business income deduction (QBI) is a tax deduction for self-employed individuals and allows a deduction of up to 20% of business income.
Phone and Internet Bills
You can deduct your phone and internet bills if they’re directly related to your business, but not if they’re for personal use.
Bad Debt
If you have bad debt from loans to customers or clients or unpaid invoices, that can be deducted as a short-term capital loss.
Charitable Contributions
Charitable contributions may qualify for tax deductions, but it’s vital to keep records of cash or check donations. You may also be able to deduct the expenses related to volunteering, but not the time itself.
What You Can't Write Off
Some business owners mistakenly believe that they can write off any expenses related to their business, but that’s not true. Here are some expenses that are generally not considered write-offs:
Food
Other than business meals, food is generally considered a personal expense that can’t be deducted for self-employed individuals.
Clothing
Clothing is generally considered personal use, even if you wear it to work. Typically, clothing is only deductible if it’s required for your work.
Federal Income Taxes
You can deduct some taxes for your business, but not federal income taxes.
Monetary Value of Volunteer Work
You can’t deduct the monetary value of volunteer work, though you can deduct for the expenses you incur while volunteering.
Personal Cell Phones
If you use your cell phone for personal and business purposes, it’s not a write off. That only applies if you have a second cell line for business use only.
Pet Expenses
The expenses for pet ownership, including veterinary bills, food, toys, or professional services, are not considered a business expense. The only exception would be if your pet provides a service for your business.
How to Track Expenses
If you want to maximize your deductions, you must have accurate records of your expenses throughout the year. Here’s how you can set yourself up for success during tax season:
Track your receipts or invoices to prove what’s been paid and when it was paid.
Retain your bank statements to track your spending and earnings to validate your expense and assess your total income.
Keep copies of canceled checks as proof of payment for your expenses.
Keep credit card statements and receipts to validate expenses paid with your credit card.
Keep your mortgage and loan documents for any properties or items that are used for your business.
Keep copies of interest statements to show what money was earned from interest-bearing accounts like savings accounts or certificates of deposit (CD). These documents will help you show any additional income earned.
Maintaining good records throughout the year will ensure that you have accurate information for tax time and helps you maximize your deductions.
Reduce Your Tax Liability and Maximize Your Cash Flow Every Year
Small-business owners and self-employed individuals have a lot of work to do during tax season, especially if they want to get all the possible deductions. In some cases, self-employed individuals are afraid to claim their available deductions, so they end up paying too much. If you learn the rules for deductions and stay organized, you can take advantage of available deductions for your business and avoid overpaying taxes.
Author Bio:
Name: Shahar Plinner
Shahar is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.
