Small Business Deductions

Self Employed Tax Deductions

Tax Deductions For Self Employed

As you read on, you'll find this information is not about investing or wealth building. But I can tell you, if you follow these strategies, you'll probably put more money in your pocket each year than you would have by having read up on investing and wealth building.

I know that's a bold statement to make; but speaking from experience, you can't argue with the facts as you'll see.

Put The Tax Laws In Your Favor

For the most part, employees can receive tax deductions for their retirement accounts, including IRA's and 401K's, charity, dependents, home property taxes and mortgage interest.

Ahh, but then there are the small business deductions which include the employee deductions PLUS much more. This includes the house or office you conduct your small business out of, your spouse, children, business dinners and entertainment, vehicle use and business vacations just to name a few.

As you'll see, the federal tax code, with its many small business deductions, was written to favor business, not employees. So why not take advantage of this.

Even running a small home based business part time will enable you to take advantage of several federal tax deductions. It's no wonder, there are have been so many home based businesses popping up.

I'm getting off track a bit, but I have to mention that in addition to the massive small business deductions available, you'll find there are other great benefits to running a home based business. For example, you can save a great deal of cash on commuting expenses, clothing and child care expenses.

As they say, time is also money and it doesn't get much better than taking that 30 second commute to your home office as opposed to that 1 to 2 hour drive per day. You just can't beat that!

Home Business Tax Deduction Goldmine

First, you need to make sure you qualify for a home business deduction. You’re entitled to a home office deduction if your dwelling unit (home, apartment, etc.) is used exclusively on a regular basis as "one" of the following:

1. Part of a daycare business
2. A separate structure not attached to your dwelling unit
3. Your primary place of business
4. A place of business where you meet with customers or patients regularly

The following are small business deductions for a home business:

• Home Office Deduction

  You can deduct the percentage of your home that is used for your business. For example, if you have a home business office that occupies 20% of the total area of your home, you can deduct housing expenses for mortgage interest, property taxes, utilities, repairs, garbage and homeowners insurance.

  For example, Jack runs an ecommerce home based business occupying 20% of his entire home. If Jack racks up $12,000 in housing expenses, he would be able to deduct (20% * $12,000) = $2,400 off of his total income.

  However, you'll find that there's a catch. Per the home office Gross Income Limitation rule, you can only deduct your home office expenses up to the net profit you earn from your home business.

  For example, if Jack only made a home business net profit of $1,000, he would only be able to deduct up to $1,000 max because his net profit is only $1,000. So, instead of $2,400, Jack can only deduct $1,000.

  The good news, this limitation only applies to the home office portion of your total business expenses. The non-home office portion of your business expenses are not subject to this limitation.

  There is also another silver lining. Jack can carry over his home office expenses that he couldn't deduct (per the gross income limitation rule) forever. In other words, you can use the excess deduction ($1,400) against future income from your home business.

• Small Business Deductions - Vehicles

  Please make sure you are using your vehicle for legitimate business use and log all of your miles for business purposes. I say this to give you a heads up because of all the small business deductions, this is the number one audited business expense.

  The IRS is aware that big deductions can be taken here and they're also aware that it’s the most abused deduction.

  You have the choice of using one of two methods for small business deductions on your vehicle. You can use the actual expenses or mileage rate methods.

  Using the actual method, you can deduct all of your business related car expenses. This includes deductions for gas, repairs, maintenance, wash, insurance, depreciation, taxes, interest and other miscellaneous car related expenses.

  Under the mileage method, also called the IRS method, the IRS allows you to deduct 55 cents per mile driven for 2009. So, if you drove 25,000 total miles during 2009 and out of that, 15,000 miles was for business, you could take a vehicle deduction of $8,250 (15,000 * 55 cents). With this method you can also deduct business related interest, tolls and taxes.

  So, the method you'll want to pick will be the one where you'll get the most small business deductions for the business use of your vehicle. Here’s the way to figure this out.

  IRS Mileage Method: You can tally up the annual number of miles you drive your car for business purposes and multiply by the 55 cents (mileage method). Don't forget to factor in the interest, tolls and taxes. Let’s say this number comes out to $4,500.

  Actual Expenses Method: Pull out your checkbook, receipts and bank statements for the previous year and add up all of your car expenses (gas, oil, repairs, insurance, and license, wash, other). Let’s say this number comes out to $5,000.

  Now you need to calculate what percentage of the $5,000 is business related. To do this, divide your business miles by the total miles driven for the year. Let’s say this comes out to 60%.

  Your business expenses for your vehicle will be $3,000 (60% * $5,000). Now, you add the vehicles depreciation (IRS Publication 463) for business use to the $3,000 figure; let’s say $2,500. This gives you a total vehicle business deduction of $5,500. Your choice would be to use the actual expenses method.

  In taking small business deductions, you'll want to make sure you keep proper vehicle logs and understand what the IRS considers to be business and personal use of your vehicle. This is very important to understand.

  The documentation is just smart business and a great backup should you ever be audited. For details concerning this, please take the time to read IRS Publication 463 - its makes good bedtime reading..

• How To Deduct Business Entertainment

  You are able to deduct 50% of your business entertainment cost. The IRS requires you to document, document, document when it comes to small business deductions for fun/entertainment. First, IRS requires you to keep receipts for all business entertainment expenses over $75.

  I would suggest keeping all receipts; even the ones for under $75. The IRS loves receipts and it won't hurt to have should you be audited.

  The IRS also requires that you must conduct your business meal in an atmosphere conducive to doing business, such as a restaurant. If you took a prospect out to a movie theater to eat and discuss business, that wouldn't fly with the IRS.

  A third requirement of the tax law, business must be discussed before, during or after the meal in order to deduct the meal.

  Finally, the IRS says you must specifically document the business meal event. You'll find using a diary or tax organizer will become one of your best friends along with your vehicle mileage log book.

  In a nutshell, document in your diary who was entertained, their business title, the date, where it took place, the cost and the objective of the event. You'll want to be specific, ie: "marketed by consulting services".

  You’re going to really like this. So long as you "first" had your business discussion in a proper business setting, such as a restaurant, you can still deduct entertainment such as a sports event, theatre, golfing, etc. following your business dinner.

• Hire Your Child

  You're going to love this. Hire your minor child as an employee of your business. Per the IRS the child must be under 18 and although it’s not clearly written into the tax code, the IRS frowns on hiring children below age 7. So, you'll want to keep the age between 7 and 17.

  There are several benefits to hiring your minor child. First, in 2008, the first $5,450 of wages your child earns is "tax free" because your child will receive a standard deduction of $5,450 on their individual tax return.

  Another benefit, you would personally still get your standard child tax deduction when you file your return. Also, kids under 18 are exempt from social security and unemployment taxes "if" your small business is set up as a sole proprietor or LLC.

  To illustrate, you hire your 10 year old child to clean your office and do some filing. For the year, you pay your child $5,450. You can deduct the $5,450 on your Schedule C and you don't have to pay social security or unemployment taxes.

  It gets better - your child will fill out his/her own 1040 and deduct the $5,450. Then, your kid can put that money into a ROTH IRA which would build up tax free to be used for education, living expenses, or what have you.

  Not only are both you and your child reaping substantial small business deductions, but you avoid paying for allowances, college, or perhaps your child can contribute to room & board.

  You'll also want to cover yourself with the IRS by paying a comparable wage to your kid that's in line with the work tasks you have them perform for you. You can call a temp agency or look at monster.com, etc to get a feel for the wage range.

  You’ll also want to make sure you always pay your kid with a check from your business checking account.

  Finally, you'll need to complete the necessary payroll forms (IRS forms 940,941, W4 and W2). You can purchase software or outsource your payroll needs. For example, you can use a service like paycycle.com; or you can find a variety of other options by googling "small business payroll".

Other Small Business Deductions

1. Tax preparation and accounting fees
2. Legal Costs
3. Internet, phone, postage PO Box costs
4. Education costs
5. Business bank fees
6. Office Supplies, rent, equipment
7. Start-up costs
8. Marketing costs
9. Subscriptions
10. Travel

Wrapping It Up

By the way, you'll also find these frugal tips to be invaluable when it comes to keeping more cash.

Take Care!!