Being self-employed is many peoples' dream. It allows them to create their own work schedules, choose their customers, and control other elements of their lives that traditional employment does not allow for. Self-employment also presents several unique opportunities and challenges that are commonly overlooked for business owners and independent contractors to reduce their taxable income.
1) Home Office Deduction: This is one of the most complex, high-reward deductions. In brief, if there is a part of your home that you use regularly AND exclusively for your business, any costs associated with it can be deducted. These costs can include mortgage interest, depreciation, property taxes, utilities, maintenance, and homeowners insurance among others. The deduction is calculated by taking the square footage of your "home office" divided by the total square footage of your home and multiplying it by all the applicable costs. In order to properly substantiate this deduction, you will want to prepare an outline of your home and work office, showing accurate measurements, and keep an organized collection of receipts for the costs applied to the deduction. If you have not maintained sufficient records, you can opt for the simplified method. This method calculates a deduction of $5 per foot up to a maximum of 300 square feet, meaning you could still get a cool $1,500 deduction.
2) Automobile & Mileage Deductions: These are a major deduction for ride-share contractors or those who drive a lot for their business. Like the home office deduction, there are two ways to calculate the deduction. The easier of the two is the standard mileage rate, which only requires you to maintain a log of business miles vs commuter miles and the dates business miles were driven. The business miles are then multiplied by a standard rate set by the IRS each year. Alternatively, if you keep detailed records, your actual expenses can be used, and will be multiplied by the percentage of business driving (business miles/total miles).
3) Self-Employed Retirement Plans: This deduction can be particularly useful and profitable. Contributions made to SEP-IRAs, SIMPLE IRAs, or Solo 401(k)s reduce your taxable income and create tax-deferred investment gains for the future. While the deductible amounts vary each year due to IRS adjustments, the 2018 limit on a given 401(k) contribution is $18,500 ($24,500 if you are 50 or older). These are excellent investments for self-employed individuals looking to save for the future while saving on their taxes in the present year.
These are just a few deductions that are available to the self-employed. The Tax Cuts & Jobs Act of 2017 introduced a new deduction available to self-employed and other business entities called the Qualified Business Income Deduction. Talk to you tax advisor for additional information and tax planning.
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