Understanding Deductions for the Self Employed
It’s tax time. Are you getting a refund? Understand deductions for the self-employed can be the difference in owing or getting money back from your tax return.
Whether you are a freelancer or have your own small business, there are tax deductions that can provide you with a lot of savings. It pays to know what actually counts as a deduction in order to lower your tax bill. Below, we explain what the IRS allows for 2015 tax deductions for those who are self-employed. If you have kept accurate records of your allowed business expenses for the year, filing your income taxes for 2015 will be a breeze.
A common myth about filing taxes as a small business owner or freelancer is that if you take the home office deduction, it invites the IRS to come knocking on your door. If you have cordoned off a space in your home that is only used for your small business, then you might be able to deduct some expenses related to the business – but certain rules apply.
Home Office Deduction
The IRS defines a home office as a space devoted strictly to your business and has no other use. Two requirements to take this tax deduction are regular and exclusive use of the space for business activities, and using your home office as your principal place of business.
A great benefit to the home office deduction is that it can be taken even if you don’t allocate an entire room for the purposes of conducting your business affairs. If you have a portion of a room that is solely used for your small business, then you can measure out the space that is tax deductible.
The IRS will ask you the entire area of your home along with the entire area of your office space. You may contact a contractor for accurate measurements if you’re unsure. To calculate the portion of your deduction, take the area of your office space and divide it by the square footage of your home. This percentage will tell you how much you can claim with regard to home business expenses such as rent and utilities.
Example: Apartment square footage: 938ft
Home office square footage: 40ft
Allowed percentage: 4.26%
In the above example, the IRS allows a claim of 4.26 percent deduction against your business income for business expenses. These expenses include mortgage, rent, insurance, repairs and the cost of utilities.
Most taxpayers either overlook the home office deduction because they are unaware of it or fail to keep adequate records in case of an audit by the IRS.
As a small business owner or freelancer you are able to deduct equipment that has been purchased for the business. This includes computers, fax machines and copiers. You may deduct 100 percent of the total cost of the item or depreciate the item’s cost over several years using a chart provided by the IRS.
If you have purchased office supplies for your business, then hold onto receipts for these purchases to deduct them from your tax bill. Office supplies include desks, printers, laptops, ink pens, printer ink, printer paper and envelopes. If you have used these items solely for the purpose of your small business, then you can deduct the cost. If you have used the items for personal use, then you must calculate the amount of use that is solely dedicated to the business and deduct that percentage against the total cost.
Internet Use and Phone
If you use the internet for your small business, then you may be able to take this tax deduction when filing your 2015 taxes. Add up your monthly internet bills and deduct the portion of which the internet was used for business. If you use the internet 80 percent of the time for business, then you can only take an 80 percent deduction of the total cost of the bill.
If you have installed a second line in your home for the sole benefit of the business, then you may take the total cost as a deduction in 2015. If you use your cell phone for business purposes, then you can only deduct the amount of usage related to the business.
Website Maintenance, Advertising Expenses and Contract Labor
If you have a website that is dedicated to your business, then you may be able to deduct any costs associated with keeping the website online and functioning. These costs include website maintenance, hosting or website design fees. If you have paid domain name registration fees, renewal fees or hosting costs, these can all serve to as 2015 tax deductions.
In order to get the word out about your business or freelance services, you may have had to advertise. This includes any advertising purchased on websites and/or business cards.
If you have paid a professional to design your website, then this counts as a deduction to your 2015 taxes. In addition, logo design is also covered as a deduction if you’ve outsourced that task to another person or company.
Contract labor is anyone of whom you’ve paid to complete tasks for your business. Examples include hiring a writer to create content for your business website or having a website professional perform an analysis of your website to benefit your business. These instances provide tax deductible expenses that you may be able to claim on your return.
If your small business requires travel, then you’re in luck because the IRS allows traveling small business owners to deduct certain costs. Among the many items you can deduct while traveling are: the cost of business travel (by air, car or train), rental cars, dry cleaning and tips for services rendered.
With regard to meals, the IRS allows for a 50 percent deduction on the total cost of eating out while traveling. These rules only apply to those traveling for business and do not apply with regard to eating meals in your home office.
Job Hunting Expenses
If you were unemployed in 2015 but sought work, you may be able to claim your expenses as a deduction on your taxes. If you itemize your deductions, you can deduct the amount spent on your job search if you were looking for a job in the same line of work you were already in.
You may be able to deduct the cost of transportation when seeking a new job and take 57.5 cents per mile if you’ve driven your own vehicle while searching for work.
If your job search takes you away from your home overnight, you can also deduct the amount paid for food and lodging. In addition, common deductions include the cost of having your resume printed out, business cards, advertising, postage and fees paid to employment agencies.
Magazines and Journals
If you subscribe to an industry-specific magazine or journal directly related to your business, the cost of the subscription counts as a tax deduction. Books purchased that benefit you or your business can be deducted.
For example, self-employed bloggers can deduct the cost of a book in the same niche. If the book or publication is directly related to your business, you can take a deduction of the cost.
In conclusion, if you are a self-employed business owner with questions about if you can take a specific deduction; you must ask yourself if the expense was necessary to your business. If your answer is yes, take the deduction. If you are unsure, it is best to seek the help of a tax professional. In all cases, keep good records for all of your expenses to avoid any issues with the IRS should they arise.
The best answer is documentation in the case of an audit by the IRS, so keep track and deduct everything that you are entitled to. The tax code is a complicated thing, but you should explore any deductions you can claim and take them – as long as you have prepared accordingly.