5 Tax Advantages Self Employed Business Owners Miss

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How are you preparing to save money at tax time?

Taxes seem to be the one topic that most small business owners love to avoid. Until tax time.

Can I let you in on a secret?

When you wait until tax time to think about your taxes, you’re too late.

Other than a retirement contribution, there is not much hope in reducing your taxes at tax time.

As a Small Business Owner, you have many opportunities to save on taxes during the year when you plan and take advantage of the deductions allowed by the IRS.

Here are 5 tax deductions that are available for your business:

1. Home Office

Tax Advantage: The percent of the square footage of your home office to the total square footage of your home is used to calculate the portion of the total of your home expenses as your deduction.

The home office deduction is often avoided because of all the misinformation shared among small business owners. The comment I hear the most, “I’ll get audited if I claim a home office.”

There is a right way and a wrong way to claim a home office and my goal is to help you set your office up the right way.

To claim the home office deduction, you must regularly use part of your home exclusively for conducting your business. The dining room table or your couch doesn’t count. Your extra room does count, or a specific area in a room that is exclusive to your business. The exterior building on your property counts.

Exclusivity is tricky for many. You may have an area in your den set up as your office. You’ve got a desk, a file cabinet, a trash can, and other office items. You feel that is an exclusive set-up. But, and this is important, you use this area to handle personal business, your children use the computer for homework, your spouse uses your desk to pay bills, print invitations, and the list keeps growing. This is not considered an exclusive area.

2. Automobile

Tax Advantage: Writing off the expense of your vehicle or claiming the mileage expense.

This is another tax deduction that many small business owners miss using.

When you are self-employed, the IRS allows you to claim the expense of using your personal vehicle for business purposes. You must keep detailed records in order to properly report the business use on your tax return.

The IRS gives you two options to choose from to calculate your deduction. A mileage log is required for both methods.

  • Mileage method: Each year the IRS sets a mileage rate that allows you to multiply the business miles driven by the mileage rate. If you put a lot of miles on your car for business, this can add up to a nice deduction.
  • Actual Expense method: You will have to determine the percentage of your mileage that was spent on business and then multiply that percentage by the total expenses related to your automobile. This would include, gas, repairs, oil changes, and more.
  • Which method is best? The one that gives you the greatest deduction is best. In general, if you have an inexpensive car or a car that is paid off, then the mileage method is best. Otherwise, the actual expense method is usually the best.

3. Health Insurance Premiums

Tax Advantage: Premiums for health, dental, and long-term care are deducted from income.

To qualify for this deduction, you must not have other health insurance coverage or eligible to participate in other coverage, and you must have business income. If your business suffers a loss for the tax year, you will not receive the deduction for health insurance.

4. Meals and Entertainment

Tax Advantage: Expenses are deductible at the percentage set by the IRS and according to their guidelines.

No, your lunch is not deductible, unless you are meeting a client at a restaurant. Then you can claim the meal as an expense. You, the business owner must be present during the meal, the meal must be served at a restaurant, and the meal cannot be lavish or expensive.

Entertainment for your clients or employees may be deductible as an expense. To qualify as a deduction, you must keep the entertainment cost separate from the food served at the event.

There are special record keeping rules that apply in order to claim this deduction.

5. Self-Employed Retirement Plans

Tax Advantage: Plan Contributions are deducted from your income lowering your taxes.

Setting up a retirement plan will require you to meet with an advisor who specializes in plans for the self-employed. There are multiple plans to choose from, each will provide a tax advantage at the end of the year. The IRS rules for this deduction changes, which requires you to stay informed on how much you may want to contribute to your personal plan.

Find the plan that works for you and enjoy the benefit of saving on your taxes and building your nest egg for your future.

These are five tax advantages enjoyed by small business owners, with many more waiting to be claimed. Be pro-active and make sure you are receiving all the tax benefits from being self-employed.

Let’s Talk

Operating your small business can be overwhelming at times, especially with all the many hats you wear. Contact me to schedule your complimentary no-obligation discussion about your small business management needs today.