Opening up a small business can lead to many great opportunities, from setting your own schedule to doing what you love every day, however, when tax time rolls around you might be hit with a large amount due. The good news is that there are various deductions and credits available for you to take to reduce your taxable income and minimize the amount you owe.
Understanding Self-Employed Status
Small businesses setup as a Sole Proprietorship and sometimes a Limited Liability Company will report income on the individual tax return. When income is reported on Schedule C of the 1040, the IRS labels you as self-employed, meaning you will be subject to self-employment taxes. These taxes are calculated based on your bottom-line number, referred to as net income, making it important to utilize all deductions and credits available. A deduction reduces your taxable income while a credit knocks down your tax due dollar for dollar, sometimes resulting in a refund.
Self-Employed Tax Deductions
Let’s dive into common self-employed tax deductions to watch out for. According to the IRS, in order to deduct a business expense, the cost must be ordinary and necessary (IRS). This means that the expense must be directly related to your business and for reasonable causes. Some common self-employed tax deductions include:
· Advertising – All marketing and promotion related to your business, such as flyers, website costs, and business cards.
· Meals – Meals with clients and employees at qualified restaurants are 100% deductible for 2021 and 2022, reverting back to 50% in 2023.
· Bank Fees – Costs associated with maintaining the business bank account.
· Auto – All expenses related to traveling to prospective clients, including gas, repairs, and maintenance.
· Depreciation – Section 179 allows businesses to write off the entire cost of assets purchased in the year placed in service, assuming your small business has income. Any asset over $2,500 should be capitalized and depreciated.
· Continuing Education – Attending seminars, workshops, and classes to further improve knowledge in your business.
· Home Office – Most small businesses operate out of their home, giving way to a deduction for rent or mortgage payments, utilities, insurance, and property taxes based on the square feet utilized.
· Professional Fees – Expenses incurred for legal, accounting and any other professional.
· Taxes and Licenses – License renewals and state fees for running your business are deductible.
· Travel – Travel, lodging and airfare for client meetings and seminars. If you mix business and personal trips, only the business portion is deductible.
· Qualified Business Income – A 20% reduction of the net income from self-employment income.
These are just a few of the common expenses that small business will see. For more information, contact a CPA.
Self-Employed Tax Credits
Self-employed individuals are also entitled to take credits that directly reduce taxes owed. The most common credit is for self-employment taxes. One half of the self-employment taxes calculated are deductible as a credit. This ensures you are only paying the employee portion of taxes and not both the employee and employer portion. You may be able to take other credits, such as Sick and Family Leave credit and others based on your situation.
All of this information may seem overwhelming, which is where a qualified accountant comes in. Abdul Tax Consulting & Accounting Services is a trusted expert on all things tax deductions and credits. For more information on the specific deductions and credits available for your small business, reach out for a consultation today.