One New Year’s Resolution that many entrepreneurs probably have at the top of their list is to get a head start on filing taxes. For the self-employed especially, the clock is ticking to get paperwork organized and determine how many business expenses are eligible for deductions. The tax deduction rule of thumb is that the expense must be ordinary and necessary, meaning that it should be accepted in your line of work and also appropriate for it. Here’s a look at five deductions self-employed workers should take advantage of.
Do you work out of your home office or use a part of your home for business? You might qualify for a home office deduction, available for all types of homes and homeowners as well as renters.
If you want to qualify for a home office deduction, you need to use that part of your home as a principal place of business exclusively and regularly. The deduction is typically based on the percentage of your home where it is used for business. Choose between the following two available options in order to determine the home deduction percentage.
Regular Method: This method determines actual home office expenses including areas like mortgage interest, insurance, utilities, and repairs. You can figure these out on Form 8829 Expenses for Business Use of Your Home and then report the deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.
Simplified Option: Better known as the Simplified Option for Home Office Deduction, this helps simplify the calculation for the business use of your home. This method allows for a standard deduction of $5 per square foot of home used for business, up to 300 square feet. If you know that you work out of a space that is larger than 300 square feet, consider using the regular method instead.
Standard mileage rates
If you spend a lot of time driving to meet with clients, your expenses for operating a vehicle for business could be deductible. Here’s what the 2016 standard mileage rates for cars, vans, and pickups looks like for business, medical, and moving purposes.
- 54 cents per mile for business miles driven, down from 57.5 cents for 2015
- 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
- 14 cents per mile driven in service of charitable organizations
Remember that if your employer reimburses your travel, you can’t deduct that expense. However, if you are only reimbursed for a small portion of the standard mileage rate, you will be able to deduct the excess amount per mile.
Health insurance premiums
According to the IRS, anyone self-employed with a net profit for the year may qualify for health insurance deduction. Keep in mind that this is not an itemized deduction, but an adjustment to income on premiums that you paid on a health insurance policy. Use Form 1040, Schedule A, Itemized Deductions to include the remainder with any other medical expenses as an itemized deduction if you haven’t claimed 100% of your paid premiums.
Website and software
Being self-employed means working hard to set up a professional online presence. If you created a new website over the last year or purchased software programs that you use in your line of work, you can deduct these expenses. Website deductions may include domain fees, maintenance, and/or building costs.
Incorporating your business
If business boomed this year and you incorporated or formed an LLC for your services, congrats! That’s a major step forward in protecting your personal assets as well as the professional assets of the business. It’s also acknowledged by the IRS for deductions. Some of the expenditures that you are able to write off during the business’ first year include state fees and legal costs. My recommendation is that if business is seriously picking up, take the time to incorporate or form an LLC for it. Saving a little extra money during tax season, plus asset protection and legitimacy for your brand — it’s a win-win for starting the new year with a bang!
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.