Starting your own business, in addition to having a number of other bright, shiny upsides, can be an incredible way to reduce your taxable income each year. But, as is the case with nearly every part of navigating tax policies, knowing what to do in order to be in the most advantageous position for your particular situation requires specific knowledge. Luckily, for the self-employed, we’ve put together a cheat sheet.
1. Home Office
Contrary to wishful thinking myth, if you work out of your home, you cannot deduct your entire mortgage/rent unless you actually use every square foot of your domicile for work-related functions (and we’re guessing you don’t sleep atop your scanner.)
2. Health Insurance
If you are self-employed and aren’t otherwise eligible for health coverage (through a spouse or parent), you can deduct your premiums for medical, dental, and long-term health insurance.
This type of deduction – in our lazy opinion – is rarely worth the record-keeping headache it causes, but it is available if you want it. If you use your car for local business related travel, you can deduct just the miles you use for that purpose. This is also one of the most oft-challenged types of tax deductions, so if you’re going to go for it, make sure you have really good records for how many miles you traveled, on which dates, and for what purposes. You can either structure the deduction using a standard mileage rate (determined annually by the IRS) or your actual expenses.
4. Business Insurance
Half of you are thinking this one is a no-brainer, and the other half of you forgot it even though it is a no-brainer. So we’re just going to leave this here and you can pretend you had already thought of it.
Yes, you can deduct utility costs but only for the actual space being used for work purposes. If you have a dedicated office space separate from your living space – especially if it’s in an entirely different location – then this is easy enough. If, however, you have a home office, deducting your utilities becomes a matter of potentially tricky math. Make sure the percentage of the utilities you are deducting is proportionate to the percentage of space your home office is occupying. If you only use things like internet or a land line for business use, deduct the total of those bills. Clearly, the way this breaks down will be very case-by-case. However you go about figuring it out for your situation, it might not be a terrible idea to run your numbers by a tax professional; deducted utility expenses on a home office are red flags for audits.
6. Continuing Education
If your business is directly served by your continuing educations – like workshops, certifications, or software classes – you can write it off. Again, just be careful. The IRS isn’t going to be too thrilled if you try to send them the bill for a French cooking class for your dry cleaning business.
7. Retirement Plans
There’s a reason we saved this for lucky number 7 – this is a likely the meatiest tax perk of being self-employed.
A few things to remember about this: you must be conducting business during the meal you’re deducting (we’ll leave it up to you to decide what counts as “business”), you can only deduct 50% of your expenses in this area, and other forms of entertainment are also eligible. Wine and dine those clients! It’s (at least partially) on Uncle Sam.